Incentives for Advanced Cybersecurity Investment

Federal RegisterMay 3, 2023

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 35

[Docket No. RM22-19-000; Order No. 893]

Incentives for Advanced Cybersecurity Investment

AGENCY:

Federal Energy Regulatory Commission.

ACTION:

Final rule.

SUMMARY:

The Federal Energy Regulatory Commission is revising its regulations to provide incentive-based rate treatment for the transmission of electric energy in interstate commerce and the sale of electric energy at wholesale in interstate commerce by utilities for the purpose of benefitting consumers by encouraging investments by utilities in Advanced Cybersecurity Technology and participation by utilities in cybersecurity threat information sharing programs, as directed by the Infrastructure Investment and Jobs Act of 2021.

DATES:

This rule is effective July 3, 2023.

FOR FURTHER INFORMATION CONTACT:

David DeFalaise (Technical Information), Office of Electric Reliability, Federal Energy Regulatory Commission, 888 First Street NE, Washington, DC 20426, (202) 502-8180,

david.defalaise@ferc.gov

Ryan Maca (Technical Information), Office of Energy Infrastructure Security, Federal Energy Regulatory Commission, 888 First Street NE, Washington, DC 20426, (202) 502-6129,

ryan.maca@ferc.gov

Adam Pollock (Technical Information), Office of Energy Market Regulation, Federal Energy Regulatory Commission, 888 First Street NE, Washington, DC 20426, (202) 502-8458,

adam.pollock@ferc.gov

Alan J. Rukin (Legal Information), Office of the General Counsel, Federal Energy Regulatory Commission, 888 First Street NE, Washington, DC 20426, (202) 502-8502,

alan.rukin@ferc.gov.

SUPPLEMENTARY INFORMATION:

TABLE OF CONTENTS

Paragraph

numbers

I. Introduction

II. Background

A. Infrastructure Investment and Jobs Act of 2021

1. Advanced Cybersecurity Technology

2. Cybersecurity Threat Information Sharing Programs

B. Study and Report to Congress

C. NOPR

III. Discussion

A. Cybersecurity Investments

1. Utilities Eligible To Request Rate Incentives for Cybersecurity Investments

2. Cybersecurity Investment Definitions

3. Cybersecurity Investment Eligibility Criteria

B. Cybersecurity Investment Incentive Requests

1. PQ List Approach

2. Case-by-Case Approach

100

3. Early Compliance With Approved Reliability Standards

112

C. Cybersecurity Investment Rate Incentives

120

1. Cybersecurity ROE Incentive

122

2. Cybersecurity Regulatory Asset Incentive

135

3. Performance-Based Rates

155

D. Cybersecurity Investment Incentive Implementation

161

1. Cybersecurity ROE Incentive Duration

161

2. Cybersecurity Regulatory Asset Incentive Duration and Amortization Period

165

3. Filing Process

174

4. Reporting Requirements

192

E. Other Issues

204

1. Comments

204

2. Commission Determination

206

IV. Information Collection Statement

207

V. Environmental Analysis

213

VI. Regulatory Flexibility Act

214

VII. Document Availability

215

VIII. Effective Date and Congressional Notification

218

I. Introduction

1. In this final rule, the Federal Energy Regulatory Commission revises its regulations pursuant to section 219A of the Federal Power Act (FPA)

to add subpart K, consisting of § 35.48, to our regulations to establish rules for incentive-based rate treatment for certain voluntary cybersecurity investments

by utilities

as described in this final rule. These rules make incentive-based rate treatment available to utilities that make voluntary cybersecurity investments in Advanced Cybersecurity Technology

that

enhance their security posture by improving their ability to protect against, detect, respond to, or recover from a cybersecurity threat and to utilities that participate in cybersecurity threat information sharing programs. The Commission is issuing this final rule to comply with FPA section 219A(c).

This voluntary cybersecurity incentive-based rate treatment is for the purpose of benefitting consumers by encouraging cybersecurity investments in Advanced Cybersecurity Technology and in participation in cybersecurity threat information sharing programs.

Infrastructure Investment and Jobs Act of 2021, Public Law 117-58, section 40123, 135 Stat. 429, 951 (to be codified at 16 U.S.C. 824s-1) (IIJA).

In this final rule, the term investments includes expenditures that can be either capitalized costs or expenses.

Notwithstanding that FPA section 219A requires the Commission to offer incentives to public utilities, as discussed in section III.A.1. of this final rule, we make rate incentives also available to non-public utilities that have or will have a rate on file with the Commission, similar to Commission precedent under FPA section 219, 16 U.S.C. 824s. We intend that all references in this final rule to utilities include both public utilities and non-public utilities that have or will have a rate on file with the Commission.

FPA section 219A(a)(1) defines the term Advanced Cybersecurity Technology to mean any technology, operational capability, or service, including computer hardware, software, or a related

asset, that enhances the security posture of public utilities through improvements in the ability to protect against, detect, respond to, or recover from a cybersecurity threat. IIJA, Public Law 117-58, section 40123, 135 Stat. at 951 (to be codified at 16 U.S.C. 824s-1(a)(1)). FPA section 219A(a)(2) defines the term Advanced Cybersecurity Technology Information to mean information relating to advanced cybersecurity technology or proposed advanced cybersecurity technology that is generated by or provided to the Commission or another Federal agency.

Id.

at 952 (to be codified at 16 U.S.C. 824s-1(a)(2)).

IIJA, Public Law 117-58, section 40123, 135 Stat. at 952 (to be codified at 16 U.S.C. 824s-1(c)).

Id.

2. We establish a regulatory framework for utilities to request incentive-based rate treatment for certain voluntary cybersecurity investments.

Under this framework, we: (1) identify the utilities permitted to request incentive-based rate treatment for cybersecurity investments; (2) establish the criteria that the Commission will use to determine whether a cybersecurity investment is eligible to receive an incentive-based rate treatment; (3) discuss the approaches that a utility may use to demonstrate that a cybersecurity investment satisfies the eligibility criteria; (4) explain the types of incentive-based rate treatments available for qualifying cybersecurity investments; (5) set limits on the duration of the incentive-based rate treatment; (6) describe what utilities must include in their applications for incentive-based rate treatment for cybersecurity investments; and (7) establish the annual reporting requirements for utilities that receive incentive-based rate treatment for their cybersecurity investments.

Incentives for Advanced Cybersecurity Investment,

Notice of Proposed Rulemaking, 87 FR 60567 (Oct. 6, 2022), 180 FERC ¶ 61,189 (2022) (NOPR).

II. Background

A. Infrastructure Investment and Jobs Act of 2021

3. On November 15, 2021, the IIJA was signed into law.

Section 40123 of the IIJA added section 219A to the FPA, which directs the Commission to revise its regulations to establish, by rule, incentive-based, including performance-based, rate treatments for the transmission of electric energy in interstate commerce and the sale of electric energy at wholesale in interstate commerce by public utilities for the purpose of benefitting consumers by encouraging investments by public utilities in Advanced Cybersecurity Technology and participation by public utilities in cybersecurity threat information sharing programs.

IIJA, Public Law 117-58, 135 Stat. 429.

1. Advanced Cybersecurity Technology

4. Under FPA section 219A(a), an Advanced Cybersecurity Technology can be a product and/or a service.

Cybersecurity products are generally hardware, software, and cybersecurity services that can be used for information technology (IT) systems and/or operational technology (OT) systems.

Cybersecurity products can include, but are not limited to, security information and event management systems, intrusion detection systems, anomaly detection systems, encryption tools, data loss prevention systems, forensic toolkits, incident response tools, imaging tools, network behavior analysis tools, access management systems, configuration management systems, anti-malware tools, user behavior analytic software, event logging systems, and any system for access control, identification, authentication, and/or authorization control.

Id.

at 952 (to be codified at 16 U.S.C. 824s-1(c)).

The National Institute of Standards and Technology (NIST) glossary defines OT to mean programmable systems or devices that interact with the physical environment (or manage devices that interact with the physical environment). These systems/devices detect or cause a direct change through the monitoring and/or control of devices, processes, and events. Examples include industrial control systems, building management systems, fire control systems, and physical access control mechanisms. NIST,

Computer Security Resource Center, Glossary

(Mar. 10, 2022),

https://csrc.nist.gov/glossary.

5. Cybersecurity services may be either automated or manual and can include, but are not limited to, system installation and maintenance, network administration, asset management, threat and vulnerability management, training, incident response, forensic investigation, network monitoring, data sharing, data recovery, disaster recovery, network restoration, log analytics, cloud network storage, and any general cybersecurity consulting service.

6. Under FPA section 219A(a), Advanced Cybersecurity Technology Information may include, but is not limited to, plans, policies, procedures, specifications, implementation, configuration, manuals, instructions, accounting, financials, logs, records, and physical or electronic access lists related to or regarding the Advanced Cybersecurity Technology. FPA section 219A(g) states that Advanced Cybersecurity Technology Information that is provided to, generated by, or collected by the Federal Government under FPA section 219A subsections (b), (c), or (f) shall be considered to be critical electric infrastructure information under FPA section 215A.

Utilities submitting to the Commission Advanced Cybersecurity Technology Information or other information they believe to be Critical Energy/Electric Infrastructure Information (CEII) must clearly indicate which portions of their filing contains CEII and provide public and non-public versions of the information pursuant to the Commission's regulations.

IIJA, Public Law 117-58, section 40123, 135 Stat. at 952 (to be codified at 16 U.S.C. 824s-1(g)) (citing 16 U.S.C. 824o-1).

See

18 CFR 388.113(d)(1)(i)-(ii).

2. Cybersecurity Threat Information Sharing Programs

7. FPA section 219A(c) directs the Commission to identify incentive-based rate treatments that could support participation by public utilities in cybersecurity threat information sharing programs. Utilities face barriers to participating in cybersecurity information sharing programs, such as the high costs associated with implementing monitoring technology and maintenance of sensor technology, the amount of time and effort required to share information, incurring fees to participate in cybersecurity threat information sharing programs, and concerns regarding the confidentiality of the information once shared.

B. Study and Report to Congress

8. As an initial step in the process of revising the Commission's regulations, FPA section 219A(b) requires the Commission to conduct a study, in consultation with certain entities,

to identify incentive-based rate treatments, including performance-based rates, for the jurisdictional transmission and sale of electric energy that could support investments in Advanced Cybersecurity Technology and participation by public utilities in cybersecurity threat

information sharing programs.

As directed, Commission staff consulted with the specified entities to help identify incentive-based rate treatments that could enhance the security posture of the Bulk-Power System.

FPA section 219A(b) identifies the following entities: the Secretary of Energy; North American Electric Reliability Corporation (NERC); Electricity Subsector Coordinating Council (ESCC); and National Association of Regulatory Utility Commissioners (NARUC).

IIJA, Public Law 117-58, section 40123, 135 Stat. at 952 (to be codified at 16 U.S.C. 824s-1(b)).

The term Bulk-Power System is defined in FPA section 215 and refers to: (1) facilities and control systems necessary for operating an interconnected electric energy transmission network (or any portion thereof); and (2) electric energy from generation facilities needed to maintain transmission system reliability. 16 U.S.C. 824o(a)(1). In the context of developing and determining the applicability of mandatory Reliability Standards, NERC uses the term bulk electric system, which NERC defines to generally include the transmission facilities that are operated at 100 kV or higher and real power or reactive power resources connected at 100 kV or higher.

See

NERC, Glossary of Terms Used in NERC Reliability Standards (Mar. 8, 2023),

https://www.nerc.com/pa/Stand/Glossary%20of%20Terms/Glossary_of_Terms.pdf

(NERC Glossary).

9. In addition to conducting the study, FPA section 219A(b) requires the Commission to submit a report to Congress (Report) detailing the results of the study. On May 13, 2022, the Report was submitted to Congress.

The Report, among other things, outlined prior Commission efforts to address incentives for cybersecurity initiatives. The Report provided information regarding potential incentive-based rate treatments and the Commission's general ratemaking authority, including the prior adoption of rate incentives and performance-based ratemaking in other contexts. In addition, the Report discussed challenges associated with adopting an incentive-based rate structure to enhance the security posture of the Bulk-Power System.

FERC,

Incentives for Advanced Cybersecurity Technology Investment

(May 2022).

C. NOPR

10. On September 22, 2022, the Commission issued the NOPR in this proceeding, proposing under FPA section 219A to establish rules for incentive-based rate treatments for certain voluntary cybersecurity investments by utilities.

The Commission proposed that these rules would make incentives available to utilities that make certain cybersecurity investments that enhance their security posture by improving their ability to protect against, detect, respond to, or recover from a cybersecurity threat, or that participate in cybersecurity threat information sharing programs to the benefit of ratepayers and national security.

NOPR, 180 FERC ¶ 61,189 at P 1.

11. First, the Commission proposed a regulatory framework for how a utility could qualify for incentives for eligible cybersecurity investments.

Under this framework, the Commission proposed that eligible cybersecurity investments must: (1) materially improve cybersecurity through either an investment in Advanced Cybersecurity Technology or participation in a cybersecurity threat information sharing program;

and (2) not already be mandated by Critical Infrastructure Protection (CIP) Reliability Standards, or local, State, or Federal law.

The Commission proposed that a utility would seek incentive-based rate treatment for a cybersecurity investment in a filing pursuant to FPA section 205,

and that the incentive would be effective no earlier than the date of the Commission order approving the incentive request.

Id.

P 2.

Id.

PP 20-22.

Id.

16 U.S.C. 824d. The Commission noted that a utility would be permitted to first file a petition for declaratory order to seek a Commission determination on its eligibility for an incentive, but the utility would still need to make a filing with the Commission pursuant to FPA section 205 before adding the incentive-based rate treatment to its rate on file with the Commission.

NOPR, 180 FERC ¶ 61,189 at P 24.

12. Second, the Commission proposed to evaluate cybersecurity investments using a list of pre-qualified expenditures that are determined by the Commission to be eligible for incentives, which would be posted on the Commission's public website (PQ List).

The Commission proposed that any cybersecurity investment that is on the PQ List would be entitled to a rebuttable presumption of eligibility for an incentive.

With the Commission having evaluated cybersecurity investments to include on the PQ List in advance of the application for incentive-based rate treatment, along with the rebuttable presumption, the Commission postulated that the PQ List approach would provide an efficient and transparent mechanism for determining appropriate cybersecurity investments that are eligible for incentives.

The Commission also discussed and sought comment on a potential alternative approach, whereby a utility's cybersecurity investment would be evaluated on a case-by-case basis to determine if it is eligible for an incentive.

Id.

P 25.

Id.

P 26.

Id.

P 27.

Id.

P 32.

13. Third, the Commission proposed two potential cybersecurity incentives: (1) a return on equity (ROE) adder of 200 basis points (Cybersecurity ROE Incentive);

and (2) deferred cost recovery for certain cybersecurity investments that enables the utility to defer expenses and include the unamortized portion in its rate base (Cybersecurity Regulatory Asset Incentive).

Id.

P 36.

Id.

P 39.

14. Fourth, the Commission proposed that any approved incentive(s) would remain in effect for five years from the date on which the cybersecurity investment(s) enters service or the expenses are incurred, or expire earlier if certain other conditions discussed in the NOPR are met before the end of that five year period,

e.g.,

the cybersecurity investment becomes mandatory.

For continued voluntary participation in a cybersecurity threat information sharing program, however, the Commission proposed that utilities be able to continue deferring these expenses and including them in their rate base for each annual tranche of expenses, for as long as: (1) the utility continues incurring costs for its participation in the program; and (2) the program remains eligible for incentives.

The Commission sought comment on the proposed duration and expiration conditions for incentives granted under this proposal.

Id.

PP 46-49.

Id.

P 49.

15. Finally, the Commission proposed that a utility receiving a cybersecurity incentive pursuant to the proposed rule must make an annual informational filing by June 1 of each year following the receipt of incentive for as long as the utility receives the incentive.

The Commission proposed that the annual filing should detail the specific cybersecurity investments that were made pursuant to the Commission's approval and the corresponding FERC account used.

Id.

PP 54-56.

See

18 CFR pt. 141.

16. The initial comment period for the NOPR ended on November 7, 2022, and the Commission received 27 initial comments. The reply comment period for the NOPR ended on November 21, 2022, and the Commission received six reply comments.

III. Discussion

17. To implement the statutory directive in FPA section 219A, we add subpart K to our regulations, consisting of § 35.48, to establish the rules for incentive-based rate treatment for utilities that voluntarily make cybersecurity investments as described in this final rule. For this final rule, a

cybersecurity investment includes both expenses and capitalized costs associated with Advanced Cybersecurity Technology and participation in a cybersecurity threat information sharing program. In this final rule we: (1) identify the utilities permitted to request incentive-based rate treatment for cybersecurity investments; (2) establish the criteria that the Commission will use to determine whether a cybersecurity investment is eligible to receive an incentive-based rate treatment; (3) discuss the approaches that a utility may use to demonstrate that a cybersecurity investment satisfies the eligibility criteria; (4) explain the type of incentive-based rate treatment available for qualifying cybersecurity investments; (5) set limits on the duration of the incentive-based rate treatment; (6) describe what utilities must include in their applications for incentive-based rate treatment for cybersecurity investments; and (7) establish the annual reporting requirements for utilities that receive incentive-based rate treatment for their cybersecurity investments.

A. Cybersecurity Investments

18. We establish a structure that allows certain entities to request rate incentives for cybersecurity investments that satisfy the eligibility criteria. First, we determine which utilities may request the cybersecurity incentives. Next, we add definitions that identify the types of investments for which those utilities could seek incentive-based rate treatment. Finally, we establish the eligibility criteria that the Commission will use to determine whether a cybersecurity investment is eligible for an incentive.

1. Utilities Eligible To Request Rate Incentives for Cybersecurity Investments

19. FPA section 219A(c) directs the Commission to establish, by rule, incentive-based rate treatment for the transmission of electric energy in interstate commerce and the sale of electric energy at wholesale in interstate commerce by public utilities for the purpose of benefiting consumers by encouraging cybersecurity investments.

IIJA, Public Law 117-58, section 40123, 135 Stat. at 952 (to be codified at 16 U.S.C. 824s-1(c)).

a. NOPR Proposal

20. In the NOPR, the Commission proposed to make rate incentives available to both public utilities as well as non-public utilities that have or will have a rate on file with the Commission, similar to Commission precedent regarding transmission incentives under FPA section 219.

The Commission explained that it intended that all references to utilities in the NOPR would include both public utilities and non-public utilities that have or will have a rate on file with the Commission.

NOPR, 180 FERC ¶ 61,189 at P 1 n.3 (citing 16 U.S.C. 824s).

b. Comments

21. Some commenters discuss the utilities that should or should not be eligible for cybersecurity incentives. American Public Power Association (APPA) agrees with the NOPR proposal that non-public utilities with rates on file with the Commission should be eligible to receive incentives for qualifying investments.

Electric Power Supply Association (EPSA) also supports the proposal and argues that the statutory language in FPA section 219A requires the Commission to extend the proposed incentives to all utilities whose rates are regulated by the Commission, including those utilities who recover their costs through competitive markets.

APPA Initial Comments at 6.

EPSA Initial Comments at 6-7.

22. EPSA contends that Congress did not intend to limit cybersecurity incentives to utilities with cost-of-service rates on file with the Commission, but rather intended to make incentive-based rates available to all utilities, including those with market-based rates.

EPSA specifically suggests that the Commission establish formula rates for costs associated with identified incented cybersecurity investments. Alternatively, EPSA suggests allowing market-based rate entities to make FPA section 205 filings to recover the costs of eligible cybersecurity investments.

In contrast, California Public Utilities Commission and the California Department of Water Resources State Water Project (California Parties) suggest that market-based rate sellers or generators should not be eligible for incentives, so as to avoid interference with competitive markets.

Transmission Access Policy Study Group (TAPS) states that the Commission should explicitly exclude generators with market-based rates from incentive eligibility.

APPA urges the Commission to clarify in the final rule that its proposed incentives are limited to cost-based rates and not available for wholesale sales made under market-based rate authority.

Id.

at 6.

Id.

at 8.

California Parties Reply Comments at 13.

TAPS Initial Comments at 26-27.

APPA Initial Comments at 22.

c. Commission Determination

23. We adopt the NOPR proposal to permit public utilities and non-public utilities that have or will have a rate on file with the Commission to seek incentive-based rate treatment for their eligible cybersecurity investments.

NOPR, 180 FERC ¶ 61,189 at P 1 n.3.

24. We add § 35.48(a) to our regulations, which declares that the purpose of this section is to establish rules for incentive-based rate treatment for utilities with rates on file with the Commission that voluntarily make cybersecurity investments. In doing so, we adopt the NOPR proposal to allow utilities described in FPA section 201(f)

that have or will have a rate on file with the Commission to be eligible to receive incentives for cybersecurity investments in the same manner as public utilities. Accordingly, we add § 35.48(c) to our regulations, which states that the Commission will authorize incentive-based rate treatment to public and non-public utilities that have or will have a rate on file with the Commission for their voluntary cybersecurity investments, provided that the resulting rate is just and reasonable and not unduly discriminatory or preferential.

16 U.S.C. 824(f).

25. In FPA section 219A(c), Congress directs the Commission to offer incentive-based rate treatment for both the transmission of electric energy in interstate commerce and the sale of electric energy at wholesale in interstate commerce. This rulemaking satisfies the statutory requirement of providing the opportunity for public and non-public utilities to file to seek authorization to recover the cost of and receive incentive-based rate treatment on eligible cybersecurity investments.

26. We disagree with EPSA's contentions that utilities that make sales of energy, capacity, or ancillary services at market-based rates should be able to continue to make those sales and also separately recover the costs of, and receive incentive-based rate treatment on, eligible cybersecurity investments. The Incentive permitted in this final rule may only be recovered through a cost-of-service rate. As noted above, the ability to seek incentive-based rate treatment under this final rule meets the requirements of FPA section 219A.

All

sellers of energy, capacity, and ancillary services are free to file cost-of-service rates under FPA section 205. Thus, we note that utilities currently making sales of energy, capacity, and ancillary services under market-based rate authority may make a filing to recover their entire cost of service, including costs of and an incentive on, eligible cybersecurity investments and proceed to make sales exclusively under that cost-based rate.

The dissent's criticism correctly notes that FPA section 219A is designed to provide incentives for certain cybersecurity investments. However, FPA section 219A also requires the Commission to

determine that any rate approved under this rule be just and reasonable, not unduly discriminatory or preferential. IIJA, Public Law 117-58, section 40123, 135 Stat. at 952 (to be codified at 16 U.S.C. 824s-1(e)). We agree with TAPS that the recovery of costs and an incentive as set forth in this final rule is not compatible with making sales at market-based rates. Therefore, our decision on this issue seeks to give meaning to all of the provisions of FPA section 219A.

Cf. PJM Interconnection, L.L.C.,

178 FERC ¶ 61,121, at P 115 (2022) (noting generators' ability to choose between selling capacity at cost-based or market-based rates).

2. Cybersecurity Investment Definitions

27. The cybersecurity investments eligible for incentives could include investments in Advanced Cybersecurity Technology, voluntary participation in a cybersecurity threat information sharing program, or both. Accordingly, we add § 35.48(b) to our regulations to define these and other terms used in that section. We incorporate the definitions of Advanced Cybersecurity Technology and Advanced Cybersecurity Technology Information in FPA section 219A(a).

Therefore, we define Advanced Cybersecurity Technology as any technology, operational capability, or service, including computer hardware, software, or a related asset, that enhances the security posture of public utilities through improvements in the ability to protect against, detect, respond to, or recover from a cybersecurity threat (as defined in section 102 of the Cybersecurity Act of 2015 (6 U.S.C. 1501)).

We define Advanced Cybersecurity Technology Information as information relating to Advanced Cybersecurity Technology or proposed Advanced Cybersecurity Technology that is generated by or provided to the Commission or another Federal agency.

In accordance with FPA section 219A(g), Advanced Cybersecurity Technology Information is considered to be Critical Electric Infrastructure Information as that term is defined in FPA section 215A(a)(3) and § 388.113(c)(1) of the Commission's regulations.

We also define CEII in new subpart K as having the same meaning as that term is defined in § 388.113 of the Commission's regulations. In addition, we define Electric Reliability Organization and Reliability Standard as having the same meanings as those terms are defined in § 39.1 of the Commission's regulations.

IIJA, Public Law 117-58, section 40123, 135 Stat. 429, 951 (to be codified at 16 U.S.C. 824s-1(a)(1), (2)).

Id.

(to be codified at 16 U.S.C. 824s-1(a)(1)).

Id.

(to be codified at 16 U.S.C. 824s-1(a)(2)).

16 U.S.C. 824o-1(a)(3); 18 CFR 388.113(c)(1).

18 CFR 39.1.

3. Cybersecurity Investment Eligibility Criteria

a. NOPR Proposal

28. In the NOPR, the Commission proposed that a cybersecurity investment must satisfy two eligibility criteria to be considered for a cybersecurity incentive.

First, the cybersecurity investment would need to materially improve cybersecurity through either an investment in Advanced Cybersecurity Technology or participation in a cybersecurity threat information sharing program. Second, the cybersecurity investment could not already be mandated by CIP Reliability Standards, or otherwise mandated by local, State, or Federal law. Additionally, the Commission sought comment on whether, and if so how, the Commission should evaluate and ensure that the benefits of the cybersecurity investment exceed the combined costs of the cybersecurity investment and incentive, to ensure that the proposed rates are just and reasonable. The Commission also sought comment on whether these would be the appropriate criteria and whether there are additional criteria or limitations that the Commission should consider (

e.g.,

whether the Commission should consider an obligation imposed by a State commission as a condition for a merger to be ineligible for an incentive).

NOPR, 180 FERC ¶ 61,189 at P 20.

29. The Commission proposed that, in determining which cybersecurity investments will materially improve a utility's security posture, the Commission will consider the following sources: (1) security controls enumerated in the NIST Special Publication (SP) 800-53 “Security and Privacy Controls for Information Systems and Organizations” catalog;

(2) security controls satisfying an objective found in the NIST Cybersecurity Framework;

(3) a specific recommendation from the Department of Homeland Security's (DHS) Cybersecurity and Infrastructure Security Agency (CISA) or from the Department of Energy (DOE);

(4) a specific recommendation from the CISA Shields Up Campaign;

(5) participation in the Cybersecurity Risk Information Sharing Program (CRISP) or similar cybersecurity threat information sharing program; and/or (6) the Cybersecurity Capability Maturity Model (C2M2) Domains

at the highest Maturity Indicator Level.

The Commission proposed that using these sources from other agencies responsible for addressing sophisticated and rapidly evolving cyber threats as qualifiers for the consideration of incentives would allow the Commission to benefit from the expertise of other Federal agencies and help ensure that the cybersecurity investments will be targeted and effective.

NIST, Special Publication 800-53, Revision 5,

Security and Privacy Controls for Information Systems and Organizations,

(Dec. 12, 2020),

https://www.nist.gov/privacy-framework/nist-privacy-framework-and-cybersecurity-framework-nist-special-publication-800-53.

See

NIST,

Cybersecurity Framework, https://www.nist.gov/cyberframework.

ee, e.g.,

CISA,

National Cyber Awareness System Alerts, https://www.cisa.gov/uscert/ncas/alerts.

See

CISA,

Shields Up, https://www.cisa.gov/shields-up.

See

DOE,

Cybersecurity Capability Maturity Model, https://www.energy.gov/ceser/cybersecurity-capability-maturity-model-c2m2.

NOPR, 180 FERC ¶ 61,189 at P 21.

b. Comments

30. Microsoft Corporation (Microsoft) and the Michigan Public Service Commission (Michigan Commission) support the proposed eligibility criteria.

The Office of the Ohio Consumers' Counsel (Ohio Consumers' Counsel) also supports the proposed eligibility criteria and recommends that the Commission require utilities to demonstrate that their eligible expenditures provide quantifiable, incremental benefits to rate payers that will exceed expenditure cost.

Microsoft Initial Comments at 1; Michigan Commission Initial Comments at 5-6.

Ohio Consumers' Counsel Initial Comments at 4-5.

31. Alliant Energy Corporate Services, Inc. (Alliant), the Interstate Natural Gas Association of America (INGAA), the National Rural Electric Cooperative (NRECA), and APPA support the proposed eligibility criterion that a utility must show that a cybersecurity investment materially improves its cybersecurity posture for its investment to be eligible for an incentive.

While NRECA supports the proposed eligibility criterion, it is concerned that “materially improves cybersecurity”

may be too subjective to ensure that cybersecurity investments provide adequate benefits to customers.

NRECA recommends that the Commission specify additional criteria or establish a minimum level of benefit or value a cybersecurity investment would provide to be eligible.

Alliant Initial Comments at 3-4; INGAA Initial Comments at 3; NRECA Initial Comments at 4-5; APPA Initial Comments at 3.

NRECA Initial Comments at 4-5.

Id.

at 5.

32. The Public Utilities Commission of Ohio's Office of the Federal Energy Advocate (Ohio FEA) and Edison Electric Institute (EEI) do not support the proposed eligibility criterion that a cybersecurity investment must materially improve cybersecurity.

Ohio FEA asserts that the term “materially improves” may be ambiguous and suggests that the Commission should provide additional detail regarding this criterion in order to achieve its objective and streamline review of cybersecurity incentives.

EEI argues that applying a “materially improve” test will lead to subjective and inconsistent results because it is unclear what additional insights the Commission would reference beyond the six sources from other agencies to satisfy the criterion.

EEI argues that the materiality test is not part of the statutory language and will not necessarily improve the cybersecurity posture of the filing utility.

EEI recommends that, instead, the Commission give utilities the flexibility to propose other sources than the six listed in the NOPR and provide context for why a cybersecurity investment supports a targeted level of cyber maturity within a broader cybersecurity risk management and control framework.

EEI Initial Comments at 8; Ohio FEA Initial Comments at 5-6.

Ohio FEA Initial Comments at 5-6.

EEI Initial Comments at 8.

Id.

at 8.

Id.

at 8.

33. Ohio FEA supports the Commission referencing other Federal agencies and activities to determine whether a cybersecurity investment materially improves cybersecurity but asserts that the final determination should be based on the specific circumstances of the filing utility.

INGAA recommends that the Federal Bureau of Investigation (FBI) and the National Security Agency (NSA) be added to the sources used to inform the Commission's determination of whether a particular cybersecurity investment satisfies the first eligibility criterion.

DOE states that, while the six sources listed in the NOPR are beneficial and valuable, they are not a comprehensive list of ways that cybersecurity can be measured.

SecurityScorecard recommends that international standards such as ISO/IEC 27000 and Information Systems Audit and Control Association's Control Objectives for Information and Related Technologies also be considered when assessing the materiality criteria.

Ohio FEA Initial Comments at 5-6.

INGAA Initial Comments at 3.

DOE Reply Comments at 6.

SecurityScorecard Initial Comments at 4.

34. DOE and EEI recommend that the Commission adjust the eligibility criteria referencing the C2M2 Domains from the highest Maturity Indicator Level to lower, incremental levels.

DOE and EEI argue that investments made to reach lower, incremental maturity levels would be more valuable than overinvestment in unnecessary controls to reach the highest Maturity Indicator Level.

DOE Reply Comments at 8-9; EEI Initial Comments at 8-9.

DOE Reply Comments at 8; EEI Initial Comments at 8.

35. Most commenters support the idea that expenditures already mandated by local, State, or Federal law or an enforceable CIP Reliability Standard should not be eligible for an incentive. EEI, NRECA, and INGAA support this eligibility criterion as proposed in the NOPR. Other commenters argue that the proposed criterion should be expanded to include other types of legally binding agreements or Reliability Standards.

TAPS, APPA, Ohio FEA, California Parties, and the Maryland Public Service Commission and Pennsylvania Public Utility Commission (Maryland and Pennsylvania Commissions) argue that investments made to satisfy any type of legal obligation should be ineligible for an incentive, including, for example, remedial measures as a settlement of NERC compliance violations, a condition of a State or Federal license, a condition of a merger proceeding, and an obligation under a cybersecurity insurance policy.

APPA further recommends that the Commission clarify whether investments are ineligible if mandated by only CIP Reliability Standards or also by any other mandatory Reliability Standard.

In addition to an expanded definition of “mandated,” TAPS recommends that the Commission require a filing utility to attest that a cybersecurity investment for which it seeks incentives is not being made to satisfy any legal obligation.

TAPS Initial Comments at 9-12; APPA Initial Comments at 13; Ohio FEA Initial Comments at 6; California Parties Initial Comments at 20; Maryland and Pennsylvania Commissions Initial Comments at 8.

TAPS Initial Comments at 12.

APPA Initial Comments at 13.

TAPS Initial Comments at 12.

36. The North American Electric Reliability Corporation and the six Regional Entities

(NERC) states that any voluntary incentives should build upon and complement existing cybersecurity CIP Reliability Standards.

NERC recommends that the Commission consider the relationship between voluntary cybersecurity investments and mandatory CIP Reliability Standards and cautions that it may be a challenge for the Commission to determine whether a particular investment is mandated by the CIP Reliability Standards.

NERC explains that, because the CIP Reliability Standards are outcome oriented and do not prescribe specific technologies, a utility may file for an incentive that, while not mandated, is being used to comply with mandatory CIP Reliability Standards.

TAPS similarly states that the Commission should take a nuanced approach to assess whether a technology exceeds the CIP Reliability Standards when a technology has been used to comply with, but is not specifically mandated by, a CIP Reliability Standard.

NRECA urges the Commission to consider whether it will grant incentives for cybersecurity expenditures that enhance the cybersecurity of low impact BES Cyber Systems or only medium or high impact BES Cyber Systems.

The six Regional Entities include the following: Midwest Reliability Organization, Northeast Power Coordinating Council, Inc., ReliabilityFirst Corporation, SERC Reliability Corporation, Texas Reliability Entity, Inc., and Western Electricity Coordinating Council.

NERC Initial Comments at 3.

Id.

at 4.

Id.

at 4-5.

TAPS Initial Comments at 12.

NRECA Initial Comments at 5;

see

NERC Glossary defining BES Cyber Systems.

37. California Parties support the addition of an eligibility criterion for information-sharing programs that the incentives be conditioned on utilities participating in all applicable regional and State cybersecurity initiatives.

DOE recommends that the Commission establish attributes that the Commission will consider when determining the eligibility of information-sharing programs for incentives.

California Parties Initial Comments at 5.

DOE Reply Comments at 10.

c. Commission Determination

38. We adopt and modify the NOPR proposal by adding § 35.48(d) to the Commission's regulations to permit a utility to receive incentive-based rate

treatment for a cybersecurity investment. We establish two eligibility criteria that require that each cybersecurity investment: (1) materially improves cybersecurity through either Advanced Cybersecurity Technology or participation in a cybersecurity threat information sharing program; and (2) is not already mandated by the Reliability Standards, or otherwise mandated by local, State, or Federal law, decision, or directive; otherwise legally mandated; or an action taken in response to a Federal or State agency merger condition, consent decree from Federal or State agency, or settlement agreement that resolves a dispute between a utility and a public or private party.

As the dissent points out, FPA section 219A(c) directs the Commission to establish rate incentives for participation by public utilities in cybersecurity threat information sharing programs and investments by public utilities in Advanced Cybersecurity Technology, which it defines as any technology, operational capability, or service, including computer hardware, software, or a related asset, that enhances the security posture of public utilities through improvements in the ability to protect against, detect, respond to, or recover from a cyber security threat. Public Law 117-58, section 40123(a), 135 Stat. 429, 951 (codified 16 U.S.C. 824s-1(c)). FPA section 219A also specifies that such rate treatments exist for the purpose of benefitting consumers and requires that the Commission ensure that resulting rates be just and reasonable.

See

Public Law 117-58, section 40123(a), 135 Stat. 429, 951 (codified 16 U.S.C. 824s-1(a) & (c)). The materially improves incentive eligibility criterion seeks to balance these statutory requirements. Solely focusing on the term enhance may result in the Commission granting incentives that do not meet these other statutory requirements mentioned above. It is thus reasonable for the Commission to exercise its judgement via the materially improves eligibility criterion to evaluate incentives requests.

39. In the NOPR, the Commission identified several sources that the Commission would consider as part of its evaluation of whether a cybersecurity investment would materially improve a utility's security posture, thereby providing quantifiable cybersecurity benefits.

Based on the comments received, we modify the NOPR proposal.

In section III.B., we discuss different methods that utilities could use to show how their cybersecurity investments satisfy the eligibility criteria.

40. As recommended by INGAA, we find that the Commission should also consider specific recommendations from the FBI and NSA. Therefore, we find that, in determining which cybersecurity investments will materially improve a utility's security posture, the Commission will consider the following sources: (1) security controls enumerated in the NIST SP 800-53 “Security and Privacy Controls for Information Systems and Organizations” catalog;

(2) security controls satisfying an objective found in the NIST Cybersecurity Framework

technical subcategory; (3) a specific cybersecurity recommendation from a relevant Federal authority, such as DHS's CISA, the FBI, NSA, or DOE;

(4) participation in a relevant cybersecurity threat information sharing program; and/or (5) achieving and sustaining one or more of the C2M2 Domains at the highest Maturity Indicator Level.

Considering these sources as part of a Commission determination of whether a particular cybersecurity investment would materially improve cybersecurity will allow the Commission to approve objective, targeted, and effective cybersecurity investments for incentive treatment.

NIST, Special Publication 800-53, Revision 5,

Security and Privacy Controls for Information Systems and Organizations,

(Dec. 12, 2020),

https://www.nist.gov/privacy-framework/nist-privacy-framework-and-cybersecurity-framework-nist-special-publication-800-53.

See

NIST,

Cybersecurity Framework, https://www.nist.gov/cyberframework.

ee, e.g.,

CISA,

National Cyber Awareness System Alerts, https://www.cisa.gov/uscert/ncas/alerts.

See

DOE,

Cybersecurity Capability Maturity Model, https://www.energy.gov/ceser/cybersecurity-capability-maturity-model-c2m2.

As we discuss in section III.B.1., when considering whether to add a cybersecurity investment to the PQ List, the Commission will determine whether the cybersecurity investment would materially improve cybersecurity for all utilities. As we discuss in section III.B.2., when evaluating a utility case-by-case application for incentive-based rate treatment for a particular cybersecurity investment, the Commission will determine whether the cybersecurity investment would materially improve cybersecurity for the utility requesting the incentive-based rate treatment.

41. In addition, we agree with DOE's and Ohio FEA's recommendation that the Commission expand the list of potential eligible cybersecurity threat information sharing programs beyond CRISP. We clarify that a utility may seek an incentive for participation in other cybersecurity threat information sharing programs and the Commission will consider whether such cybersecurity threat information sharing programs would qualify for incentive treatment. We will not, as EEI suggests, consider recommendations other than the five sources described above. Considering other sources would increase subjectivity and unpredictability of incentive-based rate treatment of cybersecurity investments.

42. We agree with DOE's and California Parties' recommendation that the Commission should establish eligibility criteria or attributes in evaluating cybersecurity threat information-sharing programs. The Commission will evaluate any proposed relevant cybersecurity threat information-sharing program to determine whether the program: (1) is sponsored by the Federal or State government; (2) provides two-way communications from and to electric industry and government entities; and (3) delivers relevant and actionable cybersecurity information to program participants from the United States electricity industry.

43. We decline to adopt SecurityScorecard's recommendation that the Commission consider international standards, such as ISO/IEC 27000, when assessing the materiality criteria. Like NIST SP 800-53, ISO/IEC 27000 provides a catalog of information and cyber-related security controls. While there are some differences in focus between the two standards, for the context of determining how to successfully categorize a cybersecurity investment used to improve the security posture of a utility, both standards perform similar functions. Therefore, we believe that considering such international standards in assessing materiality would be duplicative and unnecessary and we will not adopt this recommendation. Instead, we will use NIST SP 800-53 as the foundation of security controls to evaluate whether a cybersecurity investment materially improves the cybersecurity of a utility because NIST SP 800-53 was developed by a Federal agency and is publicly accessible without additional cost.

44. We also decline to adopt DOE and EEI's recommendation that the Commission provide incentives for any incremental steps taken by utilities in connection with C2M2 and not just for achieving the highest Maturity Indicator Level. The C2M2 model contains descriptive cybersecurity measures at a high level rather than prescriptive requirements. Therefore, it would be difficult for the Commission to determine that compliance with incremental steps necessarily materially improves cybersecurity. For these reasons, we are requiring a utility to demonstrate that its proposed cybersecurity investments will cause the utility to achieve Maturity Indicator Level 3 of the C2M2 Domains rather than the incremental steps of the lower Maturity Indicator Levels in order to receive an incentive for its cybersecurity investments.

45. TAPS, APPA, Ohio FEA, California Parties, and the Maryland and Pennsylvania Commissions request that the Commission ensure that investments made to satisfy any type of legal obligation be ineligible for an incentive. The Maryland and Pennsylvania

Commissions comment that utilities should not receive incentives for implementing cybersecurity measures that are already made mandatory by existing and future obligations.

APPA comments that the Commission should broaden the second eligibility criterion to clarify that incentives would not be available for cybersecurity investments for mandatory Reliability Standards and that the Commission should replace the reference to the CIP Reliability Standards with Reliability Standards.

We agree with both suggestions. Accordingly, we are expanding the second eligibility criterion to emphasize the requirement that the utility must undertake the specific cybersecurity investment voluntarily in order to receive a cybersecurity incentive pursuant to our regulations. Our revised § 35.48(d)(2) provides that a cybersecurity investment is only eligible for an incentive if it is not already mandated by the Reliability Standards as maintained by the Electric Reliability Organization, or otherwise mandated by local, State, or Federal law, decision, or directive; otherwise legally mandated; or an action taken in response to a Federal or State agency merger condition, consent decree from Federal or State agency, or settlement agreement that resolves a dispute between a utility and a public or private party.

Maryland and Pennsylvania Commissions Initial Comments at 8.

APPA Initial Comments at 5.

A mandate must either be for a utility to achieve a specific outcome or to require a utility to take a prescribed action. General mandates to improve a utility's cybersecurity may still make specific cybersecurity investments voluntary for purposes of the Commission's evaluation of the eligibility criteria.

46. Additionally, we recognize the concerns raised by NERC and TAPS about the difficulty in determining whether a particular cybersecurity investment is mandatory. Accordingly, as discussed in greater detail in section III.D.3., we are adopting TAPS's suggestion that, in order to demonstrate that the specific cybersecurity investment for which the utility is seeking an incentive is voluntary, the applicant must include an attestation in its filing so stating.

The attestation must be made by a senior person within the utility that the utility has authorized to act on behalf of the utility. One example of a senior person could be the CIP Senior Manager as NERC defines that term. NERC Glossary at 10 (defining CIP Senior Manager to mean “A single senior management official with overall authority and responsibility for leading and managing implementation of and continuing adherence to the requirements within the NERC CIP Standards, CIP-002 through CIP-011.”).

47. TAPS raises issues about technologies that both meet and exceed the Reliability Standards. We recognize that there could be a single Advanced Cybersecurity Technology that provides multiple security controls that allow the utility to meet and potentially exceed compliance with a Reliability Standard. In that instance, where the utility makes a single cybersecurity investment for security controls to comply with a Reliability Standard, that investment will not be incentive-eligible. However, there may be instances where a utility invests in a single Advanced Cybersecurity Technology that while complying with a Reliability Standard also provides enhanced cybersecurity controls that go beyond compliance with a Requirement in the Reliability Standard. In those instances, only the incremental investment to exceed the Requirement of the Reliability Standard would be eligible for an incentive.

48. In response to NRECA's concerns regarding the reliability and security of low impact BES Cyber Systems, we are not requiring any eligibility criteria other than the two discussed above. Therefore, low impact BES Cyber Systems are not excluded from eligibility for incentive-based rate treatment for cybersecurity investments.

49. We disagree with EEI's conclusion that we should omit “materially improve” as the standard for the first eligibility criterion due to its absence from the statutory language and possible subjectivity. FPA section 219A requires the Commission to offer incentives for Advanced Cybersecurity Technology investments and participation in information-sharing programs. It does not require that the Commission provide incentives for

all

Advanced Cybersecurity Investments or participation in

any

information-sharing program. FPA section 219A also requires that the Commission ensure that rates are just and reasonable and not unduly discriminatory or preferential.

Without a materiality standard in the first criterion (or something similar), any Advanced Cybersecurity Investment that is not mandatory would be incentive-eligible, regardless of whether such investments enhance a utility's security posture or result in just and reasonable rates. Furthermore, use of such a standard is consistent with Commission precedent. In Order No. 679, the Commission required applicants for transmission incentives to show that requested incentives are tailored to the risks and challenges of individual projects, even though such a requirement is not included in the statutory language of FPA section 219.

FPA section 219A(e)(1). FPA section 219A(e)(2) also prohibits unjust and unreasonable double recovery for Advanced Cybersecurity Technology. IIJA, Public Law 117-58, section 40123, 135 Stat. at 952 (to be codified at 16 U.S.C. 824s-1(e)(2)).

See Promoting Transmission Investment Through Pricing Reform,

Order No. 679, 71 FR 43294 (July 31, 2006), 116 FERC ¶ 61,057, at P 26,

order on reh'g,

Order No. 679-A, 72 FR 1152 (Jan. 10, 2007), 117 FERC ¶ 61,345 (2006),

order on reh'g,

119 FERC ¶ 61,062 (2007).

50. We recognize that the materially improves criterion requires use of Commission subject matter expertise and judgement. In exercising its subject matter expertise and judgement, the Commission will take into account the findings of other Federal agencies to inform its decisions, as described in section III.B.2.c. Although the Commission seeks to maximize predictability and transparency in its provision of incentives, some degree of judgement is necessary given the many types of cybersecurity threats and investments and their rapid evolution. It is for this reason that we also decline NRECA's request that the Commission provide additional criteria or a baseline level of benefit. As discussed in section III.C.3., quantification of benefits may be difficult for cybersecurity investments, such that a bright line benefit requirement is inappropriate. In this final rule, we are establishing eligibility criteria that balance the need to ensure that incentives are targeted at the most beneficial investments with recognizing that there are many potential cybersecurity investments which could provide a wide variety of benefits. We find that overly prescriptive eligibility criteria may unduly preclude incentive-based rate treatment of beneficial cybersecurity investments.

51. Although the Commission sought comment on whether, and if so how, the Commission should evaluate and ensure that the benefits of the cybersecurity investment exceed the combined costs of the cybersecurity investment and the incentive, to ensure that the proposed rates are just and reasonable, we will not at this time predicate incentive eligibility on such a cost-benefit showing. As the Commission proposed in the NOPR and we affirm here, the rates, including the costs of any incentive, must remain within the zone of reasonableness. This is necessary to ensure that the rates that include incentives for cybersecurity investments are just and reasonable and not unduly discriminatory or preferential.

52. Ohio Consumers' Counsel argues that there must be quantifiable, incremental benefits that can be measured in cost-benefit savings to consumers. Nevertheless, we find that quantification of the costs and benefits for each cybersecurity investment is

neither required nor practical. Such a cost-benefit analysis is particularly inapt for cybersecurity where benefits are even harder to identify and quantify than are economic and reliability benefits for transmission investments. The courts have long recognized that a primary purpose of the FPA, and its counterpart the Natural Gas Act (NGA), is to encourage the orderly development of plentiful supplies of electricity and natural gas at reasonable prices.

To carry out this purpose, the Commission may consider non-cost factors as well as cost factors.

100

Moreover, Congress' enactment of section 219A reflects its determination that incentives generally can spur cybersecurity investments and their associated consumer benefits.

Order No. 679, 116 FERC ¶ 61,057 at P 65 (citing

Pub. Util. Comm'n of the State of Cal.

FERC,

367 F.3d 925, 929 (D.C. Cir. 2004) (citing

NAACP

FPC,

425 U.S. 662, 670 (1976))).

100

Id.

(citing

Permian Basin Area Rate Cases,

390 U.S. 747, 791, 815 (1968);

Me. Pub. Utils. Comm'n

FERC,

454 F.3d 278, 288 (DC Cir. 2006)).

53. As the Commission proposed in the NOPR, we find that all cybersecurity investments must satisfy both of the eligibility criteria in order to be eligible for incentive treatment. In addition, we now clarify that a utility may not request an incentive for a cybersecurity investment that the utility has already been incurring for more than three months prior to the filing of the incentive application, as discussed in section III.C.2 of this final rule, unless that cybersecurity investment is for participation in an incentive-eligible cybersecurity threat information sharing program.

B. Cybersecurity Investment Incentive Requests

54. In order to maximize predictability and transparency in our provision of incentives, we provide below a framework for evaluating whether certain cybersecurity investments, including expenses and capitalized costs, are eligible for a cybersecurity incentive. First, as the Commission proposed in the NOPR, we include a list of pre-qualified investments, the PQ List, to identify certain cybersecurity investments that the Commission finds merit the rebuttable presumption of eligibility for all utilities and are therefore eligible for incentive-based rate treatment. We also discuss the procedures that we will use to update the PQ List. Second, we adopt the cybersecurity investments proposed in the NOPR for inclusion on the initial PQ List. Third, we describe how the Commission will evaluate whether a utility's cybersecurity investments that are not included on the PQ List may be eligible for incentive-based rate treatment. Finally, we discuss how a utility can seek incentive-based rate treatment for new cybersecurity investments made to comply with a Reliability Standard during the period after the Commission approves a new or modified cybersecurity Reliability Standard but before that new or modified cybersecurity Reliability Standard becomes mandatory and enforceable.

1. PQ List Approach

a. Structure of the PQ List

i. NOPR Proposal

55. In the NOPR, the Commission proposed to create a PQ List that would identify cybersecurity investments that the Commission determined would satisfy the eligibility criteria.

101

The Commission proposed that any cybersecurity investment that the Commission includes on the PQ List would be entitled to a rebuttable presumption of eligibility for an incentive.

102

However, an applicant would still need to demonstrate, and the Commission would need to find, that the proposed rate, inclusive of the cybersecurity incentive, is just and reasonable. The Commission proposed to provide an opportunity for protestors to rebut this presumption by demonstrating that the cybersecurity investment did not meet one or more of the eligibility criteria (

e.g.,

that, given the unique circumstances of the utility, the expenditure for which the utility seeks an incentive would not materially improve cybersecurity or is otherwise mandatory for that utility) or the Commission could make this finding based on other evidence.

101

NOPR, 180 FERC ¶ 61,189 at P 25.

102

Id.

P 26.

56. The Commission explained that the PQ List approach would provide efficiency and transparency benefits.

103

The utility-specific incentive filings under the PQ List approach could be substantially streamlined compared to a case-by-case approach because the Commission would have pre-reviewed the cybersecurity investments included on the PQ List for eligibility for incentives.

103

Id.

P 27.

57. In the NOPR, the Commission noted the rapidly evolving nature of cybersecurity threats and solutions and that it expected to regularly evaluate the PQ List and update it as necessary.

104

When updating the PQ List, the Commission could add, modify, or remove cybersecurity investments to/from the PQ List. The Commission proposed that it would update the PQ List via a rulemaking, whether

sua sponte

or in response to a petition.

104

Id.

P 31.

ii. Comments

58. INGAA, Microsoft, TAPS, the Michigan Commission, Ohio Consumers' Counsel, ITC Companies, APPA, Anterix, Inc. (Anterix), OT Coalition, Avangrid, Inc. (Avangrid), MISO Transmission Owners, EPSA, and EEI support the PQ List approach.

105

OT Coalition, Avangrid, MISO Transmission Owners, EPSA, and EEI further urge the Commission to consider using both the PQ List and case-by-case approaches.

106

ITC Companies agree with the Commission that the PQ List approach will decrease the filing and review burden on utilities and the Commission

107

while INGAA and Microsoft agree that the PQ List approach will provide transparency for utilities as to what expenditures will be eligible for incentives.

108

Microsoft and Anterix caveat their support of the PQ List approach by suggesting other items for inclusion on the PQ List, such as security incident and event monitoring, user and entity behavior analysis,

109

and private LTE wireless broadband communication systems.

110

TAPS, Michigan Commission, and Ohio Consumers' Counsel recommend that the PQ List be updated regularly,

111

and APPA underscores the need for stakeholders to have the opportunity to rebut the presumption of eligibility.

112

105

INGAA Initial Comments at 4; Microsoft Initial Comments at 2; TAPS Initial Comments at 4; Michigan Commission Initial Comments at 6; Ohio Consumers' Counsel Initial Comments at 8-9; ITC Companies Initial Comments at 4-5; APPA Initial Comments at 17; Anterix Initial Comments at 5; OT Coalition Initial Comments at 2; Avangrid Initial Comments at 5; MISO Transmission Owners Initial Comments at 6-7; EPSA Initial Comments at 5; EEI Initial Comments at 5.

106

OT Coalition Initial Comments at 2; Avangrid Initial Comments at 5; MISO Transmission Owners Initial Comments at 6-7; EPSA Initial Comments at 5; EEI Comments at 5.

107

ITC Companies Initial Comments at 4-5.

108

INGAA Initial Comments at 4; Microsoft Initial Comments at 2.

109

Microsoft Initial Comments at 1-2.

110

Anterix Initial Comments at 5.

111

TAPS Initial Comments at 6; Michigan Commission Initial Comments at 6; Ohio Consumers' Counsel Initial Comments at 8-9.

112

APPA Initial Comments at 5.

59. In contrast, Alliant, the Maryland and Pennsylvania Commissions, and DOE assert that that the PQ List approach with its rebuttable presumption of eligibility will lessen innovation by encouraging utilities to pursue the same types of cybersecurity investments (

i.e.,

those on the PQ List), regardless of the utility's individual

needs and risks.

113

California Parties, while not necessarily opposed to the concept of a PQ List approach, strongly oppose giving filing utilities a rebuttable presumption of eligibility for expenditures on the PQ List.

114

They argue that the burden on a party seeking to rebut the presumption of eligibility is too great.

115

113

Alliant Initial Comments at 4-5; Maryland and Pennsylvania Commissions Initial Comments at 6.

114

California Parties Initial Comments at 28-29.

115

Id.;

California Parties Reply Comments at 11-12.

60. Many commenters raise concerns that finding a balance between transparency and security will prove challenging for the Commission. NRECA cautions that a publicly accessible PQ List will alert adversaries to the cybersecurity activities of utilities and create a security risk.

116

Alliant recommends that, if the Commission decides to proceed with the PQ List approach, it defer to NERC for identification of technologies and designate the PQ List as CEII to protect it from public access.

117

On the other hand, California Parties and the Maryland and Pennsylvania Commissions underscore the need for public transparency and access to allow stakeholders to rebut the presumption of eligibility and utilities to know what types of expenditures are eligible.

118

116

NRECA Initial Comments at 7-8.

117

Alliant Initial Comments at 4-5.

118

California Parties Initial Comments at 28-29; Maryland and Pennsylvania Commissions Initial Comments at 5-6.

61. Some commenters describe the challenges that maintaining an updated PQ List will present for the Commission. Ohio FEA and the Maryland and Pennsylvania Commissions express concern that the Commission may be unable to maintain a current PQ List, due to the lengthy regulatory process required,

119

potentially leading to overinvestment in outdated measures and underinvestment in cutting edge technologies.

120

Most commenters support frequent and regular review and updates to the PQ List.

121

EEI recommends that the Commission commit to reviewing and updating the PQ List on a regular cadence no less than annually, while Anterix, Avangrid, TAPS, and Ohio Consumers' Counsel suggest regular and expeditious updates.

122

TAPS and Ohio Consumers' Counsel recommend that, when the Commission initiates a rulemaking to modify the PQ List, it should assess whether existing expenditures still meet the eligibility criteria in addition to assessing new additions.

123

119

Ohio FEA Initial Comments at 14; Maryland and Pennsylvania Commissions Initial Comments at 5.

120

Maryland and Pennsylvania Commissions Initial Comments at 5.

121

Avangrid Initial Comments at 5; EEI Initial Comments at 6-7; TAPS Initial Comments at 5; Ohio Consumers' Counsel Initial Comments at 8; Anterix Reply Comments at 4.

122

EEI Initial Comments at 6-7; Anterix Reply Comments at 4.; Avangrid Initial Comments at 5; TAPS Initial Comments at 5; Ohio Consumers' Counsel Initial Comments at 7.

123

TAPS Initial Comments at 5; Ohio Consumers' Counsel Initial Comments at 8.

62. California Parties and NRECA emphasize that modifications to the PQ List should only be made via a full rulemaking process where stakeholders and customers have the opportunity to comment.

124

California Parties further argue that the Commission should not expand the initial PQ List in its final rule without a full notice-and-comment period for the suggested additions.

125

TAPS highlights that the rulemaking process will improve regulatory certainty for utilities and customers and facilitate participation and input on whether proposed expenditures meet the eligibility criteria.

126

124

NRECA Initial Comments at 8-9; California Parties Initial Comments at 33-34.

125

California Parties Initial Comments at 11-12.

126

TAPS Initial Comments at 5.

63. Indicated PJM Transmission Owners

127

and Anterix recommend that the Commission hold a technical conference to inform its decision making on reviewing and updating the eligible expenditures on the PQ List.

128

127

Indicated PJM Transmission Owners consist of: American Electric Power Service Corporation on behalf of its affiliates, Appalachian Power Company, Indiana Michigan Power Company, Kentucky Power Company, Kingsport Power Company, Ohio Power Company, Wheeling Power Company, AEP Appalachian Transmission Company, Inc., AEP Indiana Michigan Transmission Company, Inc., AEP Kentucky Transmission Company, Inc., AEP Ohio Transmission Company, Inc., and AEP West Virginia Transmission Company, Inc.; Dayton Power and Light Company d/b/a AES Ohio; Dominion Energy Services, Inc. on behalf of Virginia Electric and Power Company d/b/a Dominion Energy Virginia; Duke Energy Corporation on behalf of its affiliates Duke Energy Ohio, Inc., Duke Energy Kentucky, Inc., and Duke Energy Business Services LLC; Duquesne Light Company; East Kentucky Power Cooperative; Exelon Corporation; FirstEnergy Service Company, on behalf of its affiliates American Transmission Systems, Incorporated, Jersey Central Power & Light Company, Mid-Monongahela Power Company, Keystone Appalachian Transmission Company, and Trans-Allegheny Interstate Line Company; PPL Electric Utilities Corporation; Public Service Electric and Gas Company; Rockland Electric Company; and UGI Utilities Inc.

128

Indicated PJM Transmission Owners Initial Comments at 5; Anterix Initial Comments at 12-13.

iii. Commission Determination

64. We adopt and modify the NOPR's proposal to create a PQ List by adding § 35.48(e)(1) to the Commission's regulations, which establishes the framework for a PQ List of cybersecurity investments that the Commission finds materially improves cybersecurity. We find that the cybersecurity investments on the PQ List would be entitled to a presumption of satisfying the eligibility criteria. As proposed in the NOPR, protestors may seek to rebut this presumption by demonstrating that, given the unique circumstances of the utility, the cybersecurity investment on the PQ List would not materially improve cybersecurity of the utility. We note that the utility would still need to demonstrate that it would make the cybersecurity investment voluntarily. In addition, the Commission will not presume anything about the resulting rates. Utilities seeking an incentive under the PQ List must still show that the proposed rate, including the cybersecurity incentive, is just and reasonable and not unduly discriminatory or preferential.

65. The PQ List approach is also in line with FPA section 219A(d)(2), which allows the Commission to reduce the cybersecurity risks to the facilities of small or medium-sized public utilities with limited cybersecurity resources.

129

While all utilities would benefit from the reduced filing obligations when requesting incentive treatment for cybersecurity investments on the PQ List, we expect that this approach would be particularly beneficial for small and medium-sized utilities with limited cybersecurity resources.

129

FPA section 219A(d)(2) provides that the Commission may provide additional incentives beyond incentive-based rate treatment in any case which the Commission determines that an investment in Advanced Cybersecurity Technology or in information sharing program costs will reduce cybersecurity risks to facilities of small or medium-sized public utilities with limited cybersecurity resources, as determined by the Commission. IIJA, Public Law 117-58, section 40123, 135 Stat. at 952 (to be codified at 16 U.S.C. 824s-1(d)(2)).

66. We disagree with concerns that including cybersecurity investments on the PQ List would lessen cybersecurity innovation or alert adversaries of utility cybersecurity investment. Regarding lessening innovation, as an initial matter, we note that utilities may still seek to recover in their rates all prudently incurred cybersecurity investments. Furthermore, as described in section III.B.2, we are adding a case-by-case approach that may better incent cybersecurity investments responding to rapidly evolving threats than does the PQ List. Regarding concerns about alerting adversaries, we find that such assertions are speculative and that describing and providing incentives to broadly beneficial cybersecurity investments will not unto itself

highlight either industry-wide or utility-specific vulnerabilities.

67. We disagree with comments recommending that we designate the PQ List as CEII. The PQ List does not meet the definition of CEII, because the list is general in nature and does not reveal specific vulnerabilities.

130

As discussed in section III.D.3.c., requests for incentive-based rate treatment for cybersecurity investments may include requests for CEII treatment consistent with our regulations.

131

As we approve additional PQ List items, we expect that any future PQ List item will not be more specific than what can be found in the already publicly available materials, such as the NIST publications and CIP Reliability Standards. We decline to adopt Alliant's recommendation that the Commission defer to NERC to identify eligible technologies for the PQ List. The Commission will evaluate potential cybersecurity technologies from time to time, and determine, based on the record evidence, whether it would be appropriate to add the proposed cybersecurity investments in these technologies to the PQ List.

130

See

18 CFR 388.113(c).

131

See

18 CFR 388.113.

68. We disagree with comments that the PQ List approach places an undue burden on parties seeking to rebut the presumption of eligibility. We believe that the PQ List approach appropriately balances the interests of the utilities and any potential protestors seeking to rebut the presumption of eligibility. By starting with the initial PQ List, we have identified specific cybersecurity investments that we find will materially improve the cybersecurity of utilities broadly, while enabling protestors to demonstrate that the eligibility criteria are not met in a utility's particular circumstance.

69. We acknowledge the concerns raised by commenters regarding the time necessary for the Commission to modify the PQ List. Some commenters request that the Commission commit to a regular update cycle for the PQ List. In this final rule, the Commission modifies the proposed regulation to allow the Commission to post the PQ List on its website and to update it subject to a notice and comment period or in a rulemaking. In addition, the case-by-case approach allows the Commission to evaluate whether a utility's cybersecurity investment would satisfy the eligibility criteria as to that utility. This means that utilities would not have to wait for the Commission to update the PQ List before seeking incentives for cybersecurity investments not yet included on the PQ List. In response to Indicated PJM Transmission Owners and Anterix's suggestion to have a technical conference when considering updates to the PQ List, we note that the Commission will consider such action when undertaking its periodic PQ List reviews.

b. Initial PQ Lis

i. NOPR Proposal

70. The Commission proposed to include two eligible cybersecurity investments on the initial PQ List: (1) expenditures associated with participation in CRISP;

132

and (2) expenditures associated with internal network security monitoring within the utility's cyber systems, which could include IT cyber systems and/or OT cyber systems, and which could be associated with cyber systems that may or may not be subject to the Reliability Standards.

133

The Commission believed that these cybersecurity investments would materially improve cybersecurity

134

and were not already mandated by the Reliability Standards

135

or otherwise mandated by Federal law. The Commission proposed to include CRISP, as its purpose is to facilitate the timely bi-directional sharing of unclassified and classified threat information and development of situational awareness tools that enhance the energy sector's ability to identify, prioritize, and coordinate the protection of critical infrastructure and key resources.

136

132

See

DOE,

Energy Sector Cybersecurity Preparedness, https://www.energy.gov/ceser/energy-sector-cybersecurity-preparedness.

133

NOPR, 180 FERC ¶ 61,189 at P 28.

134

E.g., both participation in CRISP and internal network security monitoring would fall under recommendations in the NIST SP 800-53 “Security and Privacy Controls for Information Systems and Organizations” catalog.

135

The Commission noted in the NOPR that it had already proposed to require NERC to develop and submit for Commission approval a mandatory Reliability Standard regarding internal network analysis and monitoring technologies for high and medium impact bulk electric system cyber systems.

See

NOPR, 180 FERC ¶ 61,189 at P 28 n.26 (citing

Internal Network Sec. Monitoring for High & Medium Impact Bulk Elec. Sys. Cyber Syss.,

Notice of Proposed Rulemaking, 87 FR 4173 (Jan. 27, 2022), 178 FERC ¶ 61,038 (2022)). The Commission has since issued a final rule directing NERC to develop and submit for Commission approval a Reliability Standard that addresses internal network security monitoring for high impact bulk electric system cyber systems and medium impact bulk electric system cyber systems with external routable connectivity.

Internal Network Sec. Monitoring for High & Medium Impact Bulk Elec. Sys. Cyber Syss.,

Order No. 887, 88 FR 8354 (Feb. 9, 2023), 182 FERC ¶ 61,021 (2023).

136

DOE,

Energy Sector Cybersecurity Preparedness, https://www.energy.gov/ceser/energy-sector-cybersecurity-preparedness.

71. The Commission also proposed to include internal network security monitoring on the PQ List because internal network security monitoring may better position a utility to detect malicious activity that has circumvented perimeter controls.

137

The Commission observed that, while the currently effective Reliability Standards do not require internal network security monitoring, NERC has recognized the proliferation and usefulness of such technology.

138

The Commission also sought comments on whether to include any additional cybersecurity investments on the initial PQ List.

137

NOPR, 180 FERC ¶ 61,189 at P 29.

138

Id.

(citing NERC,

ERO Enterprise CMEP Practice Guide: Network Monitoring Sensors, Centralized Collectors, and Information Sharing,

1 (June 4, 2021),

https://www.nerc.com/pa/comp/guidance/CMEPPracticeGuidesDL/CMEP%20Practice%20Guide%20-%20Network%20Monitoring%20Sensors.pdf

(explaining that NERC developed the guide in response to a DOE initiative “to advance technologies and systems that will provide cyber visibility, detection, and response capabilities for [industrial control systems] of electric utilities.”).

ii. Comments

72. NERC, DOE, and Microsoft support the inclusion of CRISP on the PQ List.

139

EEI and American Electric Power Service Corporation (AEP) support incentives for both new and existing participants of CRISP.

140

EEI argues that, because participation in cybersecurity threat information sharing programs is an ongoing action and CRISP participants have to occasionally upgrade technology, existing participants should be eligible to receive an incentive.

141

139

NERC Initial Comments at 3; DOE Reply Comments at 7; Microsoft Initial Comments at 2.

140

EEI Initial Comments at 11; EEI Reply Comments at 5. AEP Initial Comments at 4.

141

EEI Initial Comments at 11; EEI Reply Comments at 5.

73. APPA and California Parties oppose the Commission providing incentives for existing CRISP participants.

142

APPA and California Parties argue that an incentive must be an inducement for future action and cannot provide an incentive for actions already taken, such as recovery of an incentive for ongoing participation in CRISP if a utility is already a participant.

143

APPA further adds that CRISP participants report high satisfaction with the program and thus do not need an incentive to continue participation.

144

The Maryland and Pennsylvania Commissions and California Parties note that most major

investor-owned utilities are already part of CRISP, whether individually or as members of a respective regional transmission organization or independent system operator.

145

142

APPA Initial Comments at 5; California Parties Initial Comments at 10; California Parties Reply Comments at 8-9.

143

APPA Initial Comments at 12-13; California Parties Initial Comments at 10; California Parties Reply Comments at 8-9.

144

APPA Initial Comments at 13-14.

145

Maryland and Pennsylvania Commissions Initial Comments at 9; California Parties Initial Comments at 7-8.

74. EEI, UMass Lowell Applied Research Corporation (UMLARC), Ohio FEA, and Microsoft recommend that the Commission consider for inclusion on the PQ List additional eligible cybersecurity threat information sharing programs.

146

EEI recommends that the PQ List be expanded to include other federally funded or supported cybersecurity threat information sharing programs,

147

while Ohio FEA suggests that the National Cyber Security Division cyber-response programs under DHS should be included in the PQ List.

148

Microsoft recommends modifying the proposed language to be solution-neutral and outcome-focused to accommodate other timely bi-directional threat information-sharing programs.

149

146

EEI Initial Comments at 6; UMLARC Initial Comments at 4; Ohio FEA Initial Comments at 7-8.; Microsoft Initial Comments at 2.

147

EEI Initial Comments at 6.

148

Ohio FEA Initial Comments at 7-8.

149

Microsoft Initial Comments at 2.

75. Microsoft and EEI support the inclusion of internal network security monitoring on the initial PQ List.

150

EEI further recommends that the Commission broaden the eligibility for incentives to cybersecurity capabilities across protective and detective controls, not only those limited to internal network security monitoring.

151

Similarly, SecurityScorecard suggests that the Commission broaden its focus from internal network security monitoring to continuous monitoring so as to secure both the perimeter and internal network.

152

Microsoft supports eligible expenditures associated with internal network security monitoring as cybersecurity best practices consistent with a Zero Trust security model, including technologies associated with asset discovery, inventory and management, network monitoring, traffic classification, and behavior analytics within the internal environment.

153

150

Id.;

EEI Initial Comments at 5.

151

EEI Initial Comments at 5.

152

SecurityScorecard Initial Comments at 6.

153

Microsoft Initial Comments at 2.

76. While acknowledging the cybersecurity benefits of internal network security monitoring, APPA and California Parties do not support its inclusion on the PQ List.

154

California Parties state that utilities have sufficient financial incentives to allocate funding towards internal network security monitoring through the Commission's existing cost recovery mechanisms, and that mandatory CIP Reliability Standards are better suited than incentives for facilitating widespread adoption of internal network security monitoring.

155

APPA argues that internal network security monitoring is not a category of expenditures that can be presumed to materially improve cybersecurity prior to agreement on best practices.

156

In their reply comments, California Parties echo APPA's concerns and note the lack of consensus between commenters as to what qualifies as internal network security monitoring.

157

154

APPA Initial Comments at 18; California Parties Initial Comments at 13-14.

155

California Parties Initial Comments at 13-14.

156

APPA Initial Comments at 18.

157

California Parties Reply Comments at 10.

77. NERC notes that the CIP Reliability Standards are technology-neutral and do not prescribe specific technological methods, tools, or approaches to reach compliance.

158

NERC states that utilities and other NERC-registered entities may already be using internal network security monitoring in combination with other tools or processes to comply with Reliability Standards and therefore cautions that it may be difficult to determine whether a particular cybersecurity investment is mandatory for purposes of analyzing the second eligibility criterion.

158

NERC Initial Comments at 4-5.

78. UMLARC argues that defense communities face particular cybersecurity risks. UMLARC explains that certain defense communities are implementing community cyber force pilot programs. UMLARC recommends that the Commission place community cyber forces for information-sharing programs on the PQ List, while noting that these programs are still in pilot phases.

159

UMLARC Initial Comments at 4.

79. NERC recommends that the Commission consider the deployment of sensors as part of an operational technology visibility program, administered by the Electricity Information Sharing and Analysis Center (E-ISAC), for inclusion on the PQ List.

160

Microsoft, MISO Transmission Owners,

161

and EEI support the inclusion of internal network security monitoring on the PQ List but recommend that internal network security monitoring expenditures be consistent with a Zero Trust security model.

162

EEI suggests that technology and processes to implement, manage, and monitor user and endpoint behavioral analysis be added to the PQ List.

163

160

NERC Initial Comments at 4.

161

MISO Transmission Owners consist of: Ameren Services Company, as agent for Union Electric Company d/b/a Ameren Missouri, Ameren Illinois Company d/b/a Ameren Illinois and Ameren Transmission Company of Illinois; American Transmission Company LLC; Big Rivers Electric Corporation; Central Minnesota Municipal Power Agency; City Water, Light & Power (Springfield, IL); Cleco Power LLC; Dairyland Power Cooperative; Duke Energy Business Services, LLC for Duke Energy Indiana, LLC; East Texas Electric Cooperative; Entergy Arkansas, LLC; Entergy Louisiana, LLC; Entergy Mississippi, LLC; Entergy New Orleans, LLC; Entergy Texas, Inc.; Great River Energy; GridLiance Heartland LLC; Hoosier Energy Rural Electric Cooperative, Inc.; Indiana Municipal Power Agency; Indianapolis Power & Light Company; Lafayette Utilities Systems; MidAmerican Energy Company; Minnesota Power (and its subsidiary Superior Water, L&P); Montana-Dakota Utilities Co.; Northern Indiana Public Service Company LLC; Northern States Power Company, a Minnesota corporation, and Northern States Power Company, a Wisconsin corporation, subsidiaries of Xcel Energy, Inc.; Northwestern Wisconsin Electric Company; Otter Tail Power Company; Prairie Power, Inc.; Republic Transmission, LLC; Southern Illinois Power Cooperative; Southern Indiana Gas & Electric Company (d/b/a CenterPoint Energy Indiana South); Southern Minnesota Municipal Power Agency; Wabash Valley Power Association, Inc.; and Wolverine Power Supply Cooperative, Inc.

162

Microsoft Initial Comments at 2; MISO Transmission Owners Initial Comments at 6-7; EEI Initial Comments at 5-6.

163

EEI Initial Comments at 5-6.

80. DOE states that the PQ List should be expanded to include other information sharing programs, as well as permit case-by-case basis evaluation of other investments.

164

When considering whether to expand eligible information-sharing programs on the PQ List, DOE recommends that the Commission consider whether investments for participating in other Department-led cybersecurity programs, such as C2M2, materially improve the security posture of the utility.

165

DOE suggests the specific inclusion of the Cybersecurity for the Operational Technology Environment program on the PQ List.

166

EEI broadly suggests that the Commission expand the PQ List to include other federally funded or supported cybersecurity threat information sharing programs.

167

164

DOE Reply Comments at 6-12.

165

Id.

at 10.

166

Id.

167

EEI Initial Comments at 6.

81. Anterix recommends that the Commission include expenditures for private LTE wireless broadband communication systems as an item eligible for incentives on the PQ List.

168

MISO Transmission Owners and International Transmission Companies

(ITC Companies)

169

recommend that the Commission add expenditures for utility-owned private fiber networks to the PQ List, as well as expenditures made to upgrade or replace legacy operating systems.

170

They further suggest that the Commission should expand the PQ List to include advanced cybersecurity expenditures to address physical security, such as biometric identification, access cards or access control systems.

171

168

Anterix Initial Comments at 5.

169

ITC Companies d/b/a ITC

Transmission,

Michigan Electric Transmission Company, LLC, ITC Midwest LLC, and Great Plains, LLC.

170

MISO Transmission Owners Initial Comments at 6-7; ITC Companies Initial Comments at 5-6.

171

MISO Transmission Owners Initial Comments at 6-7; ITC Companies Initial Comments at 5-6.

82. Microsoft and EEI both recommend inclusion of user and endpoint behavioral analysis.

172

Avangrid and the Operational Technology Cybersecurity Coalition (OT Coalition) advocate for the addition of hardware and software risk management tools aimed to help identify cybersecurity threats to suppliers and vendors.

173

MISO Transmission Owners additionally propose that the Commission expand the PQ List to include cybersecurity expenditures such as for DHS's CyberSentry hardware and software.

174

172

Microsoft Initial Comments at 2; EEI Initial Comments at 6-7.

173

Avangrid Initial Comments at 6; OT Coalition Initial Comments at 3.

174

MISO Transmission Owners Initial Comments at 6.

83. Microsoft recommends expanding the PQ List to include cloud-enabled security solutions, threat intelligence, vulnerability assessment, access control and privileged access management, endpoint detection and response, firewall and network management, and multifactor authentication and biometrics.

175

EEI suggests that the Commission consider adding technology and processes to develop threat hunting capability within IT and OT environments (

e.g.,

incident response retainer fees, penetration tests, or vulnerability assessments; secure coding practices and consulting services to navigate Software Bill of Materials requirements; and data loss prevention capabilities).

176

175

Microsoft Initial Comments at 2.

176

EEI Initial Comments at 5-6.

iii. Commission Determination

84. We adopt and modify the NOPR's proposal and add § 35.48(e)(1) to the Commission's regulations to include two cybersecurity investments on the initial PQ List: (1) cybersecurity investments associated with participation in CRISP and (2) cybersecurity investments associated with internal network security monitoring within the utility's cyber systems. We find that both of these cybersecurity investments satisfy the eligibility criteria and both merit the rebuttable presumption.

85. First, we include cybersecurity investments associated with a utility's participation in CRISP. We find that a utility's participation in CRISP materially improves cybersecurity because it involves utility participation in a cybersecurity threat information sharing program. We note that such participation falls under the recommendations in the NIST SP 800-53 Security and Privacy Controls for Information Systems and Organizations catalog. In addition, CRISP: (1) is facilitated by the Federal Government; (2) provides two-way communications from and to electric industry and government entities; and (3) delivers relevant and actionable cybersecurity information to participants within the United States electricity industry. Having found that participation in CRISP satisfies the first eligibility criterion, we include it on the initial PQ List.

86. We are aware that many, but not all, utilities already participate in CRISP. Our inclusion of CRISP on the initial PQ List reflects the mandate in FPA section 291A(c) to establish incentive-based rate treatments by encouraging

participation

in cybersecurity threat information sharing programs. The mandate to incentivize

participation

indicates that all CRISP participants, not just new entrants, should be eligible to seek an incentive for any new cybersecurity investment associated with their participation, so long as that participation is voluntary.

87. Second, we include cybersecurity investments associated with a utility's investment in internal network security monitoring within the utility's cyber systems. As the Commission explained in the NOPR, a utility's cybersecurity investments associated with internal network security monitoring could include IT cyber systems and/or OT cyber systems and could be associated with cyber systems that may or may not be subject to the Reliability Standards.

88. We find that cybersecurity investments associated with internal network security monitoring within the utility's cyber systems materially improves cybersecurity because they are investments in Advanced Cybersecurity Technology. Internal network security monitoring falls under the recommendations in the NIST SP 800-53 Security and Privacy Controls for Information Systems and Organizations catalog. Having found that cybersecurity investments associated with internal network security monitoring within the utility's cyber systems satisfies the first eligibility criterion, we will include it on the initial PQ List.

89. NERC observes that some utilities may already use internal network security monitoring as part of their compliance with Reliability Standards and therefore cautions that it may be difficult to determine whether a particular cybersecurity investment is mandatory for purposes of determining whether such expenditures would qualify for incentive-based rate treatment. We have addressed this concern primarily in section III.A.3.c., and we reiterate that a utility's cybersecurity investments, including internal network security monitoring, made to comply with a Reliability Standard, will not be incentive-eligible because the utility did not make those investments voluntarily. However, there may be instances where a utility invests in internal network security monitoring that while complying with a Reliability Standard also provides enhanced cybersecurity protections that go beyond compliance with a Requirement in the Reliability Standard.

177

Those incremental cybersecurity investments in internal network security monitoring that go beyond compliance with a Requirement in a Reliability Standard would be eligible for incentive-based rate treatment provided that the utility demonstrates that the incremental cybersecurity investments satisfy the eligibility criteria.

178

With regard to NERC's concern regarding the potential difficulty of discerning which cybersecurity investments for internal network security monitoring qualify for incentive-based rate treatment, it is incumbent upon the utility to demonstrate in its filing seeking an incentive that the associated expenses are for new internal network security monitoring that is in addition to its preexisting cybersecurity programs and go beyond compliance with a Requirement in the Reliability Standard.

177

See infra

section III.C.2.c. (discussing the availability of incentive-based rate treatment for

new

cybersecurity investments).

178

We discuss in section III.D.3.c. the types of information that a utility would need to include in is filing of a request for incentive-based rate treatment for its cybersecurity investment. A utility seeking an incentive-based rate treatment for the incremental voluntary portion of its cybersecurity investment would need to identify its additional, voluntary cybersecurity investments that exceed the legal requirement. The utility would also need to distinguish the portion of the cybersecurity investment it made to comply with a legal requirement from the voluntary portion.

90. We decline at this time to add any additional cybersecurity investments to

the initial PQ List. Because of the rebuttable presumption afforded to items on the PQ List, it is important that the Commission have a high degree of confidence that such items will likely materially improve cybersecurity for all utilities. While many of the additional cybersecurity investments commenters suggest to include on the initial PQ List may indeed be beneficial investments that would improve cybersecurity, we find that suggestions offered by commenters either lack sufficient evidence to show they will materially improve cybersecurity across all utilities or lack sufficient specificity to be included on the PQ List at this time.

91. As discussed in section III.B.1.a., the Commission will, from time to time, evaluate whether it would be appropriate to modify the PQ List. As the Commission updates the PQ List over time, entities may propose to add the items that the Commission does not accept in this final rule as well as other items, assuming that the entities can provide adequate support as to why it is appropriate to include these items. We also note that we are adding a case-by-case approach in addition to the PQ List approach, and utilities can seek an incentive for these investments on an individual basis, albeit without the presumption of eligibility.

92. In response to SecurityScorecard's suggestion that the Commission broaden its focus from internal network security monitoring to continuous monitoring, we do not agree that the PQ List should be so expanded at this time, as we note that the CIP Reliability Standards already mandate perimeter monitoring in some form. In response to Microsoft and EEI's suggestions, we recognize the benefits of both the Zero Trust security model and deploying Security Information and Event Management processes. However, both are considered to be frameworks that guide cybersecurity investments rather than specific cybersecurity investments themselves. We note that the Commission could consider providing incentives to specific applications of either the Zero Trust security model or Security Information and Event Management on a case-by-case basis, and, in the future, the Commission could consider adding specific applications of these concepts to the PQ List.

93. We disagree with UMLARC that community cyber force informational-sharing programs should be on the PQ List. Community cyber forces are currently pilot programs. By their nature as pilot programs, community cyber forces do not have standardized specific attributes, nor do they have a proven track record for placement on a pre-qualified list. Given that we do not have a clear understanding of these pilot programs or any associated investments, at this time, we decline to add community cyber forces to the PQ List.

94. We disagree with Anterix, MISO Transmission Owners, and ITC Companies' proposals to include investments in private communication systems such as LTE wireless and fiber networks on the PQ List. The use of private communication systems does not necessarily provide a cybersecurity benefit because the confidentiality of data transiting those networks may not be encrypted.

95. The MISO Transmission Owners recommend that the Commission consider adding expenditures associated with the Department of Homeland Security's CyberSentry hardware and software to the PQ List.

179

CyberSentry is a pilot program, and the record in this proceeding does not include enough evidence for us to determine whether CyberSenrty would materially improve the cybersecurity of all utilities. Nevertheless, CyberSentry uses sensors to monitor the IT and OT Networks for cyber security threats, and incentive-based rate treatment for these cybersecurity investments may already be eligible cybersecurity investments as internal network security monitoring.

179

Department of Homeland Security,

ICS Security Offerings Fact Sheet, https://www.cisa.gov/sites/default/files/publications/ics_security_offerings_fact_sheet_S508C.pdf

(explaining that “CyberSentry is a voluntary pilot program that leverages best in breed, commercial off-the-shelf technologies, such as network intrusion detection tools, to identify malicious activity in Critical infrastructure (CI) ICS and corporate networks. CyberSentry participation increases real-time visibility into U.S. CI and provides the capability to detect nation-state adversaries on CI networks and derive cross-sector analytic insights.”).

96. DOE recommends that the Commission consider including the Cybersecurity for the Operational Technology Environment (CyOTE

) program on the PQ List. According to DOE, this program enhances OT threat information-gathering for the energy sector.

180

CyOTE is currently under development, and the record in this proceeding does not include enough evidence for us to determine whether cybersecurity investments associated with CyOTE would materially improve cybersecurity for all utilities. We find that MISO Transmission Owners' and ITC Companies' proposals to include investments made for physical access control systems, access cards, and biometrics are beyond the scope for this proceeding because they are not investments in Advanced Cybersecurity Technology or related to participation in a cybersecurity threat information sharing program. MISO Transmission Owners and ITC Companies also propose including investments for upgrading or replacing legacy systems. We find there is insufficient evidence in the record to determine whether the specific applications could be considered cybersecurity investments. Accordingly, we decline to include these investments on the PQ List.

180

DOE,

Cybersecurity for the Operational Technology Environment (CyOTE), https://www.energy.gov/ceser/cybersecurity-operational-technology-environment-cyote

(stating that CyOTE is a “research initiative, led by CESER in partnership with Idaho National Laboratory and energy sector partners, aims to develop tools and capabilities that can provide energy asset owners and operators with timely alerts and actionable information.”).

97. Cybersecurity investments in Advanced Cybersecurity Technology included on the PQ List must include at least one specific security control that materially improves the cybersecurity of all utilities, thus meriting a rebuttable presumption. We find that the proposals from Microsoft and EEI to expand the PQ List to cover a broader set of advanced cybersecurity solutions such as threat intelligence, vulnerability management, access control, and others are vague and lack the specificity needed to establish a record for inclusion on the PQ List. Proposals from Avangrid and the OT Coalition to include investments for hardware and software risk management tools similarly lack specificity. We therefore decline to include these investments on the PQ List at this time.

98. While proposals from EEI to consider investments related to threat hunting, penetration tests, and consulting services for Software Bill of Materials requirements describe efforts to detect cybersecurity vulnerabilities, they also lack specificity with regard to mitigation and remediation of identified deficiencies. Microsoft and EEI both propose including investments for user and endpoint behavioral analysis, and NERC proposes including investments for the deployment of OT sensors. However, commenters do not demonstrate that these items are different in scope than what is already covered by internal network security monitoring on the PQ List. Therefore, we decline to include these investments on the PQ List at this time.

99. As discussed in section III.B.1.a., the Commission will, from time to time, evaluate whether it would be appropriate to modify the PQ List. We also note that, because we are adding a case-by-case approach in addition to the PQ List approach, utilities can seek an incentive for investments not identified

on the PQ List, albeit without the presumption of eligibility.

2. Case-by-Case Approach

a. NOPR Proposal

100. In the NOPR, the Commission recognized the limitations of only adopting the PQ List approach and sought comment on whether and, if so, how it should implement a case-by-case approach to grant incentives.

181

The Commission explained that it could permit a utility to file for incentive-based rate treatment for any cybersecurity investment that the utility believes satisfies the eligibility criteria, and that the Commission would review such filings on a case-by-case basis, to determine whether the proposed cybersecurity expenditure satisfies the eligibility criteria.

181

NOPR, 180 FERC ¶ 61,189 at P 32.

101. The Commission further explained that its evaluation of a utility's application under the case-by-case approach would differ from its evaluation of a filing seeking incentives for items on the PQ List, although the eligibility criteria would be the same under either approach. Specifically, the case-by-case application would not receive a presumption of eligibility for any cybersecurity investment and the utility would bear the full burden to demonstrate in its filing that its cybersecurity investment meets the eligibility criteria. Just as it would in a filing for incentive treatment of a cybersecurity investment on the PQ List, the filing utility would also need to demonstrate that its proposed rate, inclusive of the incentive, is just and reasonable.

b. Comments

102. OT Coalition, Avangrid, MISO Transmission Owners, EPSA, INGAA, EEI, Microsoft, Ohio Consumers' Counsel, Anterix, and DOE support the adoption of a case-by-case approach in addition to the PQ List approach.

182

Alliant and the Maryland and Pennsylvania Commissions support the adoption of a case-by-case approach instead of the PQ List approach.

183

TAPS, the Michigan Commission, APPA, and California Parties oppose the Commission adoption of a case-by-case approach.

184

182

OT Coalition Initial Comments at 2-3; Avangrid Initial Comments at 5, 6. MISO Transmission Owners Initial Comments at 4; EPSA Initial Comments at 5; INGAA Initial Comments at 4; EEI Initial Comments at 4-5; Microsoft Initial Comments at 2; Ohio Consumers' Counsel Initial Comments at 9; Anterix Initial Comments at 12-13; Anterix Reply Comments at 12; DOE Reply Comments at 10.

183

Alliant Initial Comments at 4-5; Maryland and Pennsylvania Commissions Initial Comments at 7-8.

184

TAPS Initial Comments at 7; Michigan Commission Initial Comments at 6; APPA Initial Comments at 5; California Parties Initial Comments at 31-32; California Parties Reply Comments at 12-13.

103. EEI, MISO Transmission Owners, INGAA, and Anterix describe the role of a case-by-case approach as a supplement to the PQ List approach, providing flexibility for the filing utilities.

185

Microsoft, OT Coalition, and Ohio Consumers' Counsel highlight the use of the case-by-case approach as a mechanism both for utilities to file for incentives not on the PQ List and to inform additions to the PQ List.

186

INGAA asserts that the case-by-case approach will encourage utilities to make qualifying investments not included on the PQ List, which will result in strengthening the security posture of the Bulk-Power System.

187

Avangrid states that the Commission should allocate sufficient human and financial resources to ensure timely review of case-by-case incentive requests.

188

185

EEI Initial Comments at 4-5; MISO Transmission Owners Initial Comments at 4; INGAA Initial Comments at 4; Anterix Initial Comments at 12-13; Anterix Reply Comments at 12.

186

Microsoft Initial Comments at 2; OT Coalition Initial Comments at 2, 3; Ohio Consumers' Counsel Initial Comments at 9.

187

INGAA Initial Comments at 4.

188

Avangrid Initial Comments at 4.

104. Alliant and the Maryland and Pennsylvania Commissions support the adoption of a case-by-case approach over the PQ List. Alliant argues that, due to the dynamic and rapid pace at which cybersecurity solutions become obsolete, the case-by-case approach will allow the Commission to review incentive requests in light of the most current technologies available and the overall needs of the utility.

189

The Maryland and Pennsylvania Commissions assert that the case-by-case approach would encourage utilities to be more innovative in their cybersecurity improvements and allows an applicant to demonstrate how a particular incentive addresses the utility's actual needs or meets the statutory criteria specific to the individual utility.

190

Ohio FEA argues that the PQ List approach alone is an inadequate approach because it will be unable to stay abreast of the ever-changing cybersecurity landscape.

191

189

Alliant Initial Comments at 4-5.

190

Maryland and Pennsylvania Commissions Initial Comments at 7-8.

191

Ohio FEA Initial Comments at 9.

105. TAPS, the Michigan Commission, APPA, and California Parties oppose the adoption of the case-by-case approach. The Michigan Commission supports the transparency and efficiency that the PQ List provides over the case-by-case approach.

192

The Michigan Commission argues that, if a cybersecurity investment materially improves security, the investment should be considered for inclusion in the CIP Reliability Standards.

193

TAPS also enumerates concerns with the efficiency and transparency of the case-by-case approach, as well as the potential for increased litigation expenses and slower adoption of Advanced Cybersecurity Technologies.

194

APPA states that the case-by-case approach would be administratively burdensome and lead to incentives for routine, best practice cybersecurity expenditures.

195

California Parties argue that a case-by-case approach would be administratively infeasible and reduce regulatory certainty for filing utilities.

196

192

Michigan Commission Initial Comments at 6.

193

Id.

at 9.

194

TAPS Initial Comments at 7-9.

195

APPA Initial Comments at 17.

196

California Parties Initial Comments at 31-32.

106. The Iowa Utilities Board states that incentives under the case-by-case approach should be higher than those granted under the PQ List because the case-by-case approach drives innovation.

197

Iowa Utilities Board Initial Comments at 5-6.

c. Commission Determination

107. We adopt a case-by-case approach to granting incentives by adding § 35.48(e)(2) to the Commission's regulations, which permits a utility to demonstrate that a cybersecurity investment satisfies each of the eligibility criteria. Unlike the PQ List approach, the Commission will not presume that the requested cybersecurity investment satisfies the eligibility criteria. The utility requesting incentive-based rate treatment would need to demonstrate in its filing that the cybersecurity investment(s) would materially improve cybersecurity for the utility requesting the incentive-based rate treatment.

108. We find that allowing utilities to make case-by-case cybersecurity incentive requests in addition to PQ List requests provides several benefits. The case-by-case approach offers greater flexibility than the PQ List approach alone for utilities to respond to cybersecurity threats. In addition, reviewing cybersecurity investments on a case-by-case basis can help to inform the Commission about potential new additions that it could make to the PQ List in future proceedings. We believe

that, by allowing utilities to use more than one approach to show that a cybersecurity investment satisfies the eligibility criteria, we strike the right balance between customer protection, transparency, efficiency, and responsiveness to cybersecurity threats.

109. In order to determine on a consistent and transparent basis whether a cybersecurity investment satisfies the first eligibility criterion, the Commission will consider evidence showing that the utility would invest in cybersecurity improvements that: (1) are based on a documented and recommended technical cybersecurity mitigation action published in an alert or advisory by a relevant Federal agency (

e.g.,

CISA, DOE, FBI, DOD, NSA);

198

and (2) respond to an alert or advisory that meets the objective of a subcategory of the NIST Cybersecurity Framework, or its successor, and references the related NIST 800-53 Security Control, or its successor.

199

The Commission would base its assessment of the evidence on whether an incentive is appropriate on the mitigation actions detailed in the specified agencies' alerts and advisories along with the NIST Cybersecurity Framework and NIST 800-53 Security Controls to determine whether the utility's proposed cybersecurity investment would materially improve its cybersecurity.

198

Technical cybersecurity mitigation action means a recommended action requiring the purchase of software, hardware, or third-party services.

199

Some alerts may reference specific NIST 800-53 Security Controls, while others may reference security controls generally. One example of a case-by-case request for incentive-based rate treatment of cybersecurity investments is a utility requesting an incentive for an implementation of data backup procedures on both the IT and OT networks. This type of action is specifically recommended in the CISA “Shields Up” Alert.

See

CISA,

Essential Element: Your Data

(Oct. 15, 2020),

https://www.cisa.gov/sites/default/files/publications/Cyber%20Essentials%20Toolkit%205%2020201015_508.pdf.

Further, this action is covered by the NIST Cybersecurity Framework Category Information Protection Processes and Procedures, subcategory 4 and thus would be evidence that this proposed implementation would materially improve the utility's cybersecurity.

110. As discussed in section III.A.3. and consistent with the Commission's evaluations of PQ List cybersecurity investments in section III.B.1.a., under the case-by-case approach a utility would still need to demonstrate that it would make the cybersecurity investment voluntarily, and that the proposed rate, including the cybersecurity incentive, is just and reasonable and not unduly discriminatory or preferential.

111. We decline to add any additional eligibility criteria to our regulations that would apply only to cybersecurity investments that are not included on the PQ List. We find that the eligibility criteria in our regulations are sufficient for incentive requests that use either the PQ List or case-by-case approach. Similarly, we decline to offer different forms of incentives for cybersecurity investments based on whether or not the investment appears on the PQ List. We are not convinced that the benefits of cybersecurity investments made that are on the PQ List or for which a utility requests incentives on a case-by-case basis differ and would therefore merit disparate incentive levels because all incentive-eligible investments under both mechanisms must satisfy the requirement to materially improve cybersecurity in the first eligibility criterion.

3. Early Compliance With Approved Reliability Standards

a. NOPR Proposal

112. In the NOPR, the Commission proposed the second eligibility criterion limiting incentive-based rate treatment to cybersecurity investments that a utility made voluntarily.

200

The NOPR also sought comment on whether the second eligibility criterion was appropriate and whether there were additional criteria or limitations that the Commission should consider, including any potential refinements, and any other criteria for incentive eligibility that the Commission should adopt in the final rule. Finally, the NOPR proposed to allow a utility granted a cybersecurity incentive to receive that incentive until the investment or activity that serves as the basis of that incentive become mandatory pursuant to a Reliability Standard approved by the Commission.

201

This would include cybersecurity investments made by a utility to comply with Reliability Standards that the Commission has already approved pursuant to § 39.5(d) of the Commission's regulations, but that have not yet taken effect pursuant to the implementation plan approved by the Commission.

200

Id.

PP 20, 22.

201

Id.

P 46.

b. Comments

113. Many commenters discuss how the NOPR's proposed incentives would interact with and affect the CIP Reliability Standards and development processes. Indicated PJM Transmission Owners, the Michigan Commission, and EPSA note that incentives could supplement the time-intensive NERC standards development process.

202

APPA and Alliant express concern that providing incentives for cybersecurity investments would disincentivize the timely development of CIP Reliability Standards.

203

NERC advises the Commission to develop rate incentives for voluntary cybersecurity investments that build upon and complement existing CIP Reliability Standards.

204

NERC and TAPS advise the Commission to consider how the proposed incentives will affect compliance with the CIP Reliability Standards.

205

202

Indicated PJM Transmission Owners Initial Comments at 5; Michigan Commission Initial Comments at 9; EPSA Initial Comments at 2.

203

APPA Initial Comments at 13-14; Alliant Initial Comments at 7-8.

204

NERC Initial Comments at 3.

205

Id.

at 4; TAPS Initial Comments at 12.

114. Indicated PJM Transmission Owners support the availability of incentives to early adopters of cybersecurity technology.

206

The Michigan Commission discusses an approach in which the proposed Cybersecurity Regulatory Asset Incentive would be used to facilitate cybersecurity investments during the period in which said investments are evaluated for inclusion in the CIP Reliability Standards.

207

EPSA notes that the nature of the long, detailed process to develop and implement NERC CIP Reliability Standards may not be able to keep up with the rapidly evolving nature of cybersecurity threats.

208

EPSA states that it is prudent to provide incentives for protections to address rapidly evolving technologies to ensure a reliable, resilient, and operational electric grid.

209

206

Indicated PJM Transmission Owners Initial Comments at 5.

207

Michigan Commission Initial Comments at 9.

208

EPSA Initial Comments at 2.

209

Id.

115. The Maryland and Pennsylvania Commissions argue that making incentives available in the period before the completion of mandatory standards does not expedite the standards process or the voluntary adoption of improvements.

210

On the contrary, they assert that the proposed incentives actually would encourage delays in the standards development process so utilities could recover incentives for voluntary implementation.

211

The Maryland and Pennsylvania Commissions further note that the proposed incentives do not provide a tapering off period, such as over the time frame in which a CIP Reliability Standard is being developed. They assert that such a tapering period would

motivate utilities to implement material improvements as early as possible.

212

210

Maryland and Pennsylvania Commissions Initial Comments at 10.

211

Id.

at 10.

212

Id.

at 10.

116. APPA recommends that the Commission modify the proposed eligibility criteria in a manner that would disallow incentives for early adoption of CIP Reliability Standards.

213

Instead of a cybersecurity expenditure losing eligibility when it becomes mandatory pursuant to a CIP Reliability Standard, APPA recommends that the cut off for incentives should be the earlier of: (1) the date of any Commission directive that would require the investment; or (2) the date that a Standards Authorization Request is submitted to NERC to require that incentive.

214

APPA argues that it would not be just or reasonable to provide an incentive to a utility for an investment where a new or revised mandatory Reliability Standard is pending.

215

213

APPA Initial Comments at 13-14.

214

Id.

at 13-14.

215

Id.

at 13-14.

c. Commission Determination

117. We adopt an application of the case-by-case method for utilities to satisfy the eligibility criteria by adding § 35.48(e)(3) to the Commission's regulations, which permits utilities to receive incentives for cybersecurity investments made to comply with a cybersecurity-related CIP Reliability Standard (

i.e.,

excluding CIP Reliability Standards that may be related to physical security and not cybersecurity) approved by the Commission before that CIP Reliability Standard becomes mandatory and enforceable for that utility. In general, cybersecurity investments made by a utility to comply and maintain its compliance with a Commission-approved Reliability Standard will materially improve the utility's cybersecurity. Filing utilities would need to demonstrate that the cybersecurity investment(s) it will make are necessary to comply with the Reliability Standard, and that it will make those cybersecurity investments prior to the date that the Reliability Standard is mandatory and enforceable for that utility.

216

Those cybersecurity investments made by the utility before the newly-approved Reliability Standard becomes effective (

i.e.,

mandatory and enforceable) are voluntary. Those cybersecurity investments made by the utility after the newly-approved Reliability Standard becomes effective and mandatory are no longer voluntary. As required by the second eligibility criteria, all of the utility's cybersecurity investments incurred to comply with a Reliability Standard after the Reliability Standard becomes mandatory and enforceable for that utility are ineligible for incentive-based rate treatment.

216

In addition, as explained below, filings seeking the incentives would have to comply with the filed rate doctrine.

See Exxon Mobil Corp.

FERC,

571 F.3d 1208, 1211 (D.C. Cir. 2009) (citing

Towns of Concord, Norwood, & Wellesley

FERC,

955 F.2d 67, 71 & n.2 (D.C. Cir. 1992);

Ark. La. Gas Co.

Hall,

453 U.S. 571, 577-578 (1981)) (“The Commission may not retroactively alter a filed rate to compensate for prior over- or underpayments. A corollary to this rule against retroactive ratemaking, the filed rate doctrine, forbids a regulated entity to charge rates for its services other than those properly filed with the appropriate regulatory authority. Together, these rules generally limit the relief the Commission may order to prospective [rates].”) (cleaned up).

118. We find that allowing utilities to receive an incentive to comply with a Commission-approved cybersecurity-related CIP Reliability Standard before it becomes mandatory and enforceable could materially improve their cybersecurity posture during that period. In addition, we find that permitting an incentive for early compliance with approved cybersecurity-related CIP Reliability Standards will help to bridge gaps between voluntary cybersecurity measures and the cybersecurity measures mandated in the CIP Reliability Standards. It is possible that allowing utilities to receive incentives for early compliance could unintentionally incentivize standards drafting teams' artificial lengthening of the implementation period to increase the amount of time a utility could receive incentives. Nevertheless, the Commission would continue to consider whether the implementation time is reasonable when determining whether to approve the proposed CIP Reliability Standard.

217

See Rules Concerning Certification of the Elec. Reliability Org.; & Procs. for the Establishment, Approval, & Enf't of Elec. Reliability Standards,

Order No. 672, 71 FR 8662 (Feb. 17, 2006), 114 FERC ¶ 61,104, at P 333,

order on reh'g,

Order No. 672-A, 71 FR 19814 (Apr. 18, 2006), 114 FERC ¶ 61,328 (2006) (“In considering whether a proposed Reliability Standard is just and reasonable, the Commission will consider also the timetable for implementation of the new requirements, including how the proposal balances any urgency in the need to implement it against the reasonableness of the time allowed for those who must comply”).

119. We clarify that the cybersecurity investments made by a utility to achieve early compliance with an approved cybersecurity-related CIP Reliability Standard may be eligible for incentive-based rate treatment. We reiterate that, after receiving Commission authorization for incentive-based rate treatment, the utility may only collect the incentive during the period that begins with the utility achieving compliance with the approved cybersecurity-related CIP Reliability Standard and that ends according to the duration provisions of § 35.48(g), as further discussed in section III.D.

218

Therefore, the earlier that a utility complies with a new CIP Reliability Standard, the longer the utility's incentive recovery period may be.

218

In addition to having its rate that includes incentive-based treatment on file with the Commission, a utility must submit an informational filing to the Commission notifying the Commission of the date that it has achieved compliance with the approved cybersecurity-related CIP Reliability Standard.

C. Cybersecurity Investment Rate Incentives

120. The Commission proposed two potential rate incentive options for utilities that make eligible cybersecurity investments: (1) the Cybersecurity ROE Incentive, an ROE adder of 200 basis points that would be applied to the incentive-eligible investments;

219

and (2) the Cybersecurity Regulatory Asset Incentive, deferral of certain eligible expenses for rate recovery, enabling them to be part of rate base such that a return can be earned on the unamortized portion.

220

The Commission stated that both offer meaningful incentives to encourage cybersecurity investments that improve a utility's cybersecurity posture.

221

The Commission also sought comment on whether, and if so how, the principles of performance-based regulation could apply to utilities with respect to cybersecurity investments.

222

219

NOPR, 180 FERC ¶ 61,189 at P 36.

220

Id.

P 39.

221

Id.

P 33.

222

Id.

P 45.

121. The Commission also noted that most utility IT investments (general and intangible plant) and expenses (administrative and general costs) support functions of the entire utility, not just the transmission function.

223

Consequently, the Commission found that only a portion of those costs are allocated to transmission customers, typically based on wages and salaries allocators.

224

223

Id.

P 36.

224

Id.

P 36.

1. Cybersecurity ROE Incentive

a. NOPR Proposal

122. The Commission proposed to allow a utility that makes cybersecurity investments that are eligible for incentives to request the Cybersecurity ROE Incentive that would be applied to the incentive-eligible investments.

225

The Commission explained that any

incentive granted under this proposal would be subject to the total base and incentive return being capped at the top of the utility's zone of reasonableness.

226

The Commission stated that the 200-basis point ROE adder would provide a meaningful incentive to encourage utilities to improve their systems' cybersecurity. The Commission recognized that this amount exceeds the ROE incentives for transmission facilities that the Commission typically provides pursuant to FPA section 219. The Commission explained that, because cybersecurity investments are relatively small compared to conventional transmission projects, a higher ROE may be necessary to affect the expenditure decisions of utilities, without unduly burdening ratepayers.

225

Id.

P 36.

226

See, e.g., Emera Me.

FERC,

854 F.3d 9, 23 (D.C. Cir. 2017) (“The zone of reasonableness informs FERC's selection of a just and reasonable rate.”);